Stupid Questions - Catch-Ups

[Guest Chaffee]

I apologize if this is too basic, but there's so much on Catch-ups, but I haven't seen a clear answer on the following:

Are Catch-Ups an election or simply the result of "normal" contributions exceeding a limit? In a practical example, a 50+ employee elected 15% deferrals on a $100k salary in 2003. Plan stopped withholding at $12,000 claiming participant did not "elect" catch-up contributions.

The answer is usually "what does Plan Doc say?" Unforunately, it is silent to the issue other than saying that Catch-up contributions are allowed (very poor document).

Absent any further language, is this participant owed $2,000 for the Plan's failure to follow his 15% election.

Along the same line, if the plan does not elaborate, are matching contributions required on the Catch-Up amounts? I know they may be excluded, but is the default that Catch-up amounts are to be matched?

Thanks

[Tom Poje]

my understanding is that catch-ups are not made on the election by the employee - at least not 'technically'. One chooses to defer, and if it exceeds an allowable amount, then the excess would be treated as a catch up.

Take for an example a plan that fails the ADP test. Would you argue that since the employee did not elect a catch up, you would have to distribute the excess contribution to pass the test rather than treat that amount as a catch up?

[Bird]

Sounds like it was the Employer, not the Plan, that stopped withholding.

Catchups are determined after-the-fact, not elected. I'm not sure the Plan has to say anything more than that they are permitted.

I think catchups should be matched unless specifically excluded by the document.

[Guest Chaffee]

Thanks for confirming my belief.

I agree that "electing" catch-up makes no sense. I think some national payroll providers like ADP confused many employers by steering them into using two deduction codes when EGTRRA first went into place, so employers felt like these were two separate items.

[QDROphile]

A refinement to Tom Poje's response.

Participants elect to defer. The plan document can put a limit on deferrals and that limit does not have to be the 402(g) limit.

There are many ways to express deferral elections and the limits on them, including a separate election above the basic 402(g) limit. It appears that you have a plan document interpretation issue and you have a communication of election issue. The analysis of the issues depends on close reading of all the documentation involved, something that cannot be easily done in this forum.

In any event, if the participant was entitled to defer $14,000 and properly elected the deferrral, the participant is not "owed" $2000 if the employer improperly reduced pay by only $12,000. The participant already has $2000 (less taxes) too much. Perhaps your question is whether or not the participant should be credited with additional amounts of contribution. Or perhaps you are asking if the participant has a claim for some amount of damages for insufficient contributions.

[Guest KB]

Tom:

Are you stating that a plan has to allow participants who meet eligibility otherwise to make catch-up contributions? I agree with QDROphile - it's up to the participant to make a positive election to exceed 402(g) limit if the plan allows catch-ups.

[Guest Giovanni]

Don't apologize Chaffee, I think a lot of people are confused on this issue. Because it seems so basic, you would think there is a clear answer. This would be a good question to submit for the ASPA conference in DC. I have seen, and prepared myself, enrollment forms with and without the catch-up election on them. Personally, I feel it makes more sense not to make it a separate election. The employee should just choose a high enough percentage so he will get the catch-up in before the end of the year.

[Guest Chaffee]

Sounds to me like everyone else is split in this as well. Ultimately it is helpful (as always) for plan documents to be as explicit as possible).

"Electing" catch-up may be feasible when referring to the 402(g) limit or Plan Limit, but not with respect to catch-up over ADP/ACP test Limits. Because of that, it seems like classification as "catch-up" is almost assessment made after the deferrals are elected and then compared to applicable limits.

In many cases, I see participants that simply elected 20% or "maximum" for many years and were stopped once the 402(g) limit was reached (the old $10,500 and $11,000 limits). These participants haven't changed that election since before 2002, so shouldn't thay be allowed to defer 20% (as elected) up to limits allowed (absent any clear language in the document)?

QDROphile, I'm not so sure that if the participant had properly elected the catch-up and didn't receive it, they wouldn't be entitled to something from the employer (similar to if participant wasn't allowed to start deferrals timely or if definition of compensation was not followed (e.g. bonuses)). I agree with you that it seems absurd to make the employer kick in the lost employee deferral as well as lost match, but Rev Proc 2003-44 doesn't seem to follow my opinion. Do you have a different thought?

[QDROphile]

Thoughts:

How could you agree with me on something something I did not say?

If a contribution was required and not made, then a proper correction is required.

Nothing can be determined about contributions or corrections from the information that has been posted.