Matching Catch-Up Contributions in a Safe Harbor Plan

[JDuns]

I have reviewed the many postings on this question and want to confirm the following:

A plan that provides the basic safe-harbor match (100% of the first 3% deferred and 50% of the next 2% deferred) which are credited each pay period (without a year end gross up) wants to permit catch-up contributions.

Assume an employee earns 85,000 for 2004 and wants to maximize his deferrals. If he defers 19% of his compensation he will have deferred $13,000 by his 21st paycheck (of 26) and by the end of the year will have deferred $16,000.

If the plan requires that a limit be actually reached prior to classifying a contribution as a catch-up contribution and the plan does not match catch-up contributions, the employee will receive a match of $2,877. If the plan matches both catch-up and regular deferrals, the employee would receive a match of $3,400. An employer could also require the employee to make a separate election regarding the catch-up contributions which could result in a match somewhere in the middle.

If it matches the catch-up contributions, the plan avoids many of the administrative difficulties but the entire match must be tested under the ACP test (which in many plans would fail).

If it does not match the catch-up contributions, the plan (1) will have to carefully define which contributions are matched, (2) will have to review the deferrals at year end and reclassify “catch-up” contributions if a limit had not been met (and possibly correct matches), (3) may have endangered its safe harbor status because it effectively has a deferral limit that may prevent an NHCE from obtaining the maximum match.

In addition to the above discussion, the prior year catch-up contribution must be considered when performing the average benefits test using any testing period other than the current year.

Please let me know if you believe any of the conclusions above are incorrect or if there are any other considerations I have not mentioned.

[rcline46]

I fail to see where any catchup contribution was matched in your example.

The $13,000 represents 13/85 or 15.29% of pay and the catch represents the 3.53% of pay from 15.29 to 18.8%.

Therefore if every payroll deferral were matched with the basic match, no amount over 5% was ever matched.

Now if this person were not catchup eligible, and matches were on a payroll basis the sure enough, they would get a smaller match that someone of the same pay who did the 13,000 deferall over 26 pays. Tough nuggies. That's what the document says. Don't prefund.

Or make the match at year end and all the problems go away. (or a match patch)

[JDuns]

rcline46

Your post assumes that the plan characterizes a portion of each deferral as regular (matched) deferrals and catch-up (unmatched) deferrals.

If instead the plan treats all deferrals as regular (matched) until a limit is reached and only then classifies the remaining deferrals as catch-up (unmatched) then all catch-up employees will miss a portion of the match unless you match the catch-up deferrals.

[jquazza]

Where did you come up with the idea that the entire match must be tested if the plan matches catch up contributions? I don't believe that to be true. So if you match the catch ups, you don't have any issues, do you?

[g8r]

You raised a lot of issues in this one posting.

A few thoughts - if you have a safe harbor match, then presumably you are satisfying the ACP test safe harbor so I'm not sure what you mean about testing all matching contributions. If it's not an ACP safe habor plan, then I agree that all matching contributions are tested in the ACP test - it doesn't matter that a match is being made on a catch-up contribution, it's still a match that must be tested.

You can only charchterize an amount as a catch-up if a limit is exceeded. So, if you have a payroll based plan imposed limit, someone who defers a large % in the earlier months might have a portion be treated as a catch-up. At that point, you know you have a catch-up and you don't fund the match. Unfortunately, many plans impose a deferral limit based on the full year (e.g., you can only defer up to 6% of annual compensation). In that case you don't if the plan imposed limit was exceeded until the end of the year. Thus, if you are matching throughout the year, you may find that some deferrals were matched and at the end of the year you find that they were catch-up contributions and shouldn't have been matched. That's an operational violation.

The same could happen where someone defers below the plan imposed limit but you exceed another limit. For example, if it wasn't an ADP safe harbor plan, then you can have amounts recharchterized as catch-ups after the end of the year. If these amounts had already been matched yet the plan provides for no match on catch-ups, then you have an operational violation. You may be able to self-correct under EPCRS, but that only works once (b/c you need to have procedures in place to prevent it from happening again). The key is that if you don't match catch-ups, you should only be funding the match after the year is over.

I don't think you'd have a problem with the ADP safe harbor if you don't match catch-ups (i.e., I don't think NHCEs are precluded from deferring the maximum amount that is matched).

[rcline46]

There are so many preconceived notions floating about it is incredible!

First - it is a really poor plan design where a Safe Harbor plan imposes ANY limits beyond the 402(g) limits, so I will have to immediately dismiss any and all arguments speaking to plan imposed limits.

Second - since it is impossible to have a deferral which fails a 402(g) limit AND is less than 6% of pay, it is impossible for any Safe Harbor match to exist on any catch-up contribution. A regular match can of course exist on a catch-up.

That leaves us with only the question of whether you are doing Safe Harbor matches on a per payroll, monthly, quarterly, semi-annual, or annual basis - which is a document issue.

If the matches are being remitted with each payroll, then a 'true-up' or 'match patch' must be calculated on the frequency specified in the document. On anything other than an annual match it is a fact that those who reach their 402(g) limit at any time other than the last pay of the year (or who may have at any time a deferral rate which is not at the Safe Harbor limit) will receive a LOWER match than someone who does perfect timing. This is supported by the regulations and not an error.

Now if the payroll service being used by the client does not permit/calculate matches according to the regulations, the client will have to make corrections. IE if someone is catchup eligible and is deferring a full $16,000 and the payroll service cuts matches off at $13,000, then they are flat out WRONG and a correction must be made.

It does not matter if someone defers a full $16,000 on January 1, catch-ups as a matter of regulation are not determined until year end.

[jquazza]

rcline46, I don't follow your argument. You say it is impossible to SH match catch ups and then you said you will have to make the match on those catch ups?

Now if the payroll service being used by the client does not permit/calculate matches according to the regulations, the client will have to make corrections. IE if someone is catchup eligible and is deferring a full $16,000 and the payroll service cuts matches off at $13,000, then they are flat out WRONG and a correction must be made.

Anyway, in Section 14 of Chapter 11 of the ERISA Outline, Tripodi mentions (though for once he doesn't back it up by a citation) that a plan will not fail the uniform matching contribution formula because it is applying the SH match to catch up contributions.

[JDuns]

Jquazza, The need to test the match is based on the preamble to the final regs that state that "if a plan applies a single matching formula to elective deferrals whether or not they are catch-up contributions...the matching contributions under the plan must satisfy the actual contribution percentage test under section 401(m)92) taking into account all matching contributions, including matching contributions on catch-up contributions." I have heard some argue that the catch-up must pass the ACP test itself (and not one of the alternatives).

I had also been concerned about violating the uniform availability requirement and am greatly reassured by Sal's position. I would love a cite to rely on.

rcline, Do you agree that, where matching contributions are made on a payroll cycle basis, it is impossible for most employees to maximize both the 402(g) limit, catch-up contributions and match? The employee will reach the 402(g) limit before making catch-up contributions and, unless a portion of the early deferrals are characterized as catch-up contributions, the last contributions will be classified as unmatched catch-up contributions. Are you arguing that a safe harbor plan that matches on a payroll cycle basis MUST make a true-up calculation at year end? If so, do you also make a true-up match for someone who defers 10% of pay for the first half of the year?

[MWeddell]

If it matches the catch-up contributions, ... the entire match must be tested under the ACP test (which in many plans would fail).

JDuns,

I hope you're doing well!

I disagree with the portion I quoted above. Your 8/18, 12:22 PM post clarifies that you believe that the whole match must be tested based on a statement from the supplementary information for the final catch-up contribution regulation but that statement is not specific to plans designed to meet the 401(k) & 401(m) safe harbor plan design for which 401(m) testing on matching contributions is not required.

I think you'll have better luck if you look at the supplementary information to the July 2003 proposed 401(k)/ 401(m) safe harbor. There's a paragraph or 2 in there specific on whether one may or must calculate a safe harbor match on catch-up contributions.

If you come to the conclusion that you can match catch-up contributions while still avoiding the 401(m) test because of the plan's safe harbor plan design, then the administrative issues coupled with the fact that it is $0 additional cost will lead you to the conclusion that you might as well match all deferrals regardless of whether they are regular deferrals or catch-up contributions.

-- Michael

[JDuns]

The July 2003 preamble to the 401(k)/401(m) proposed regulations reads as follows:

The proposed regulations do not include any exception to the requirements for safe harbor matching contributions with respect to catch-up contributions. Treasury and the IRS are aware that there are questions concerning the extent to which catch up contributions are required to be matched under a plan that provides for safe harbor matching contributions. Treasury and the IRS are interested in comments on the specific circumstances under which elective contributions by a NHCE to a safe harbor plan would be less than the amount required to be matched, e.g., less than 5% of safe harbor compensation, but would be treated by the plan as catch-up contributions, and on the extent to which a safe harbor plan should be required to match catch-up contributions under such circumstances.

This chain has clearly identified at least one way that an NHCE could get less than the full match even though he contributed more than 5% of compensation each pay period. The preamble leads me to believe the IRS is leaning toward requiring safe harbor plans to match the catch-up contributions.

[rcline46]

iquazza,

The situation where the payroll service claims that a contribution is a catchup contribution and stops the match is a failure of the payroll company. Quite simply, the regs state that a catchup can only be determined at year end. Therefore if the payroll service cuts off matches when one reaches $13000 is an incorrect interpretation of the regs.

Now you and I both know that the amount over 13,000 will be a catchup. Appearences and foreknowledge aside, it just ain't at the time, and matches must be made. They are NOT being made on catchup contributions, because it has not been determined that they ARE catch up contributions! So my statements are not in conflict.

So an error is being made by the payroll service, and the client must correct that error. Mathematically, under proper plan design, one cannot give a SH match on a catchup contribution.

For the really astute, there is an exception to every rule. If the plan has an employer contribution of any kind which when combined with the deferral will exceed the 415© limit of $41,000/100% of pay, AND you document says to return unmatched then matched contributions FIRST, AND no catch up has been made, THEN it is possible to get a Plan Limit catch-up which has been matched.