Catch up contributions only allowed?

[Guest jusducki]

Never have run into this situation before - 401(k) with Flexible Safe Harbor provision - plan has 3 HC/1 non-highly - non-highly does not contribute to 401(k) - 3 HC always have contributed max and, until '06, has had the Guaranteed Safe Harbor provision - changing to Flexible for '06 - all HC are 50+ - can they each contribute $5000 as catch-up contributions assuming the non-highly continues to defer no salary? anxious to hear what you gurus have to say about this! Thanks in advance

[rcline46]

Actually they have to defer $5,000 each, then fail the ADP test and have the $5,000 reclassified as Catchup. Unfortunately, if they do NOT do a Safe Harbor Match, I bet they are Top Heavy, and then a 3% will be due the NCE anyway!

Now since a Catchup does not count as an HCE contribution requiring a TH contribution why would I say that? The answer is that it is reclassified as a catchup instead of being distributed, so the primary testing has a contribution, and THAT requires the TH contribution. The failed ADP does not eliminate the fact of the contribution. It only becomes a catch-up in lieu of a distribution. IMHO

[Guest jusducki]

Thanks for your detailed reply - since there is only one Key ee, the plan is not Top Heavy so it looks like the HCs can defer the $5000 and re-classify it when ADP fails. Interesting....

[mschwechter]

Actually, you can have a 401(k) plan, and have a provision that the elective deferral limitation for the HCE's is 0%, then they can put in the $5k catch up deferral, not worry about the test, and not have Top Heavy considerations, since catch up deferrals don't count against any tests.

[rcline46]

mschwechter - I am uncomfortable with stating a -0- deferral for HCEs and then putting in a catch up contribution, because the -0- deferral implies they cannot make deferrals, and without making deferrals I don't see how they get to the catch up.

Also, catch up contributions DO count in account balances for determining Top Heavy. They do not count in determining the % contribution for Top Heavy minimums.

[austin3515]

You plan probably has a section that says, if the Plan is projected to fail the ADP test, the sponsor can place an administrative cap on HCE's deferrals to ensure the test will pass. Because the NHCE's are deferring 0, the only reasonable limit for the HCE's is zero. And with a plan imposed limit, anything over that limit is a catch-up. (without the such a plan provision, this won't work).

This is all very well documetned in the ERISA Outline Book somewhere. Perfectly legit.

[Guest esi-jht]

What about this type of scenario: Participant works for an employer who maintains a 401k plan. This participant is catch-up eligible. This participant also has a separate business for which he is the sole owner. This business maintains a 401a plan. Can this Participant make a contribution into his own 401a plan that exceeds the 415 limit by the catch up amount and consider the excess a "catch-up" under the other plan? I'm saying no, but getting some argument about it from others in my office. Just wanted another opinion.

[Guest Pensions in Paradise]

Maybe I'm missing something, but I don't see what the argument can possible be about. Catch up contributions can only be made to a plan which provides for 401(k) deferrals. If the plan maintained by the participant does not have a 401(k) provision, the participant cannot make a catch up contribution to that plan.