Are plans required to allow catch-up?

[oriecat]

I'm having a little disagreement. I discovered an employee is over their annual limit already, due to computer error. I say his limit should be $13k, other says $16k due to catch-up. I said our plan doesn't allow it, other says all over 50s can catch-up. The final regs say "An employer is not required to provide for catch-up contributions in any of its plans." Seems cut and dry to me, but I want to make sure I am not missing something. Also, if the plan doesn't allow it, and we allow him to do the 16k anyway, then the whole plan could be in violation, right?

Thanks!

[MGB]

You are correct. This is optional. If plan doesn't allow it, you can't do it.

[E as in ERISA]

My understanding is the same as yours. I think that the only way a participant can have a "catch up" without the plan providing for it is where the participant is in two separate plans and exceeds the 402(g) limit.

[R. Butler]

The plan does not have to allow catch up contributions. Why wouldn't the plan allow them though?

[oriecat]

Thanks all!

I don't know why it wasn't included when the plan was restated, I just know I was told that we decided not to. *shrug*

[actuarysmith]

I disagree with Katherines response (or more likely I don't understand it......... lol)

You cannot exceed the 402(g) limit no matter how many plans you are a participant in. You are obligated to inform the employer of at least one of the plans that you have contributed in excess of the limits.

If the refund is not corrected by March 15th (I think), then the excess will be taxed and you will NOT be able to distribute. Then the amount will be taxed again later when actually distributed at termination - double taxed. Look it up, I am not making this up!

[david rigby]

You are obligated to inform the employer of at least one of the plans that you have contributed in excess of the limits.

Huh?

[E as in ERISA]

Actuarysmith -- see Regulations Section 1.402(g)-2(b):

“[A] catch-up eligible participant who makes elective deferrals under applicable employer plans of two or more employers that in total exceed the applicable dollar amount under section 402(g)(1) by an amount that does not exceed the applicable dollar catch-up limit under either plan may exclude the elective deferrals from gross income, even if neither applicable employer plan treats those elective deferrals as catch-up contributions.”

[Guest jhilliard]

I'm no Einstein but it appears Katherine has nailed this one!

Kudos!

[MGB]

I wasn't convinced, so I did some more reading of the 414(v) regulations. My concern was for the situation where both plans did not allow catchups. (I would have thought that the person would be limited to the 402(g) limit in the aggregate and could not make catch-ups.)

Does the fact that the plans do not allow catch-ups affect the definitions of "catch-up eligible participant" (i.e., if you are a participant in plans that do not allow catch-ups, are you still one of these?), and the definition of "applicable employer plan" (if it doesn't allow catch-ups, is it still one of these?). (Note that both of these terms are used in 1.402(g)-2(b) referenced earlier.) If either of these definitions are affected, then the person can only do the 402(g) limit in the aggregate.

Well, I was surprised. The participant definition (1.414(v)-1(g)(3)) is not restricted to being a participant in plans that allow catch-ups. You only have to be over 50 and eligible to make elective deferrals.

The applicable plan definition (1.414(v)-1(g)(1)) is only a list of the types of plans that can have catch-ups - they don't need to actually have them to be an applicable plan.

So, now I am convinced. A person in two plans, both of which do not allow catchups, can still electively defer the 402(g) limit plus catch-up limit somehow allocated between the two plans as long as the 402(g) limit is not exceeded in either one.

[E as in ERISA]

Actually, I myself am not 100% sure. The statute and regulations simply say that it's not "treated" as a catch-up by the plan -- which is a little bit different than saying that the plan doesn't provide for catch-ups. And the regulation makes reference to the applicable dollar catch-up limit under the plans but that may be a problem with the regulation because the statute doesn't say that. I think that it's at least arguable.

[mbozek]

Isnt the practical answer that since there is no w-2 reporting of whether a plan permits catch up contributions, IRS cant limit contributions which are made to the plans of two employer to $13,000. If the IRS wanted to limit the application of the catch up to participants in plans that had a catch up provision, it would have said so (e.g., the regs permit only 1 catch up regardless of how many plans the participant makes contributions to).

[MGB]

Well, there is an extremely small probability that a person will be a participant in two or more plans, with none of them having a catch up provision.

So, this might have just been a mental exercise.

[Belgarath]

Yes, but to paraphrase the (probably apocryphal) quote attributed to Yogi Berra, "90% of this business is half mental."

You could probably also make a case that all exercise is mental...

[Brian Gallagher]

As a reply to a post above, the 402(g) violations must be corrected by April 15 (it used to be March 1!). As an aside: RMD's are April 1 (for the first one).

[E as in ERISA]

Mental exercise should be expected in a field with lots of rules and exceptions to those rules and then exceptions to those exceptions. At some point almost every statement can be true. Then its only a matter of context. Whomever oriecat is debating may be insistent because he know that someone told him that the plan doesn't have to provide catch-ups in order for them to apply. The best answer may be "yes, but that rule only applies in the following situation...." Then the other person doesn't have to be wrong...just incomplete.

[R. Butler]

In the situation oriecat describing incomplete is wrong.