Calculating Matching on Catchups Each Payroll

[Guest stormfrog2000]

The final regulations permit matching on catchups "... if a plan applies a single matching formula to elective deferrals whether or not they are catchup contributions, the matching formula as applied to catch-up eligible participants is not treated as a separate benefit, right, or feature under §1.401(a)(4)-4 from the matching formula as applied to the other participants."

Fine, but I have a client that allows participants to make catchup contributions throughout the year, at a dollar amount per payroll period. The matching formula is 100% on first 6% deferred, including catchups. Up to 50% of comp can be deferred. Each paryoll period their system calculates a match on the regular deferral field and also matches a separate catchup field up to 6% of comp each, with an aggregate annual dollar limit for 2006 of $13,200. (6% of $220,000)

Assuming that everything orginally deferred as a catchup, turns out to be a catchup at the end of the year, then we end up with really disparate matching percentages. It appears that we have both a potentially discriminatory match and / or that we are failing to follow the plans matching formula. Perhaps we don't have a problem, (particularly if we raised the deferral limit to 75% of comp to pass the universal availablity safe harbor). Any thoughts? Can we, should we, have ADP combine the regular deferral and the catchup into one field and then calculate a match on that field?

EE A: $220,000 Comp, $20,000 deferral, $13,200 total match, 6% of eligible comp.

EE B: $150,000 Comp, $20,000 deferral, $9,000 match regular + $4,200 catchup match, 8.8% of comp.

EE C: $100,000 Comp, $20,000 deferral, $6,000 regular match + $5,000 catchup match, 11% of comp.

EE D: $ 50,000 Comp, $20,000 deferral, $3,000 regular match + $3,000 catchup match, 12% of comp.

EE E: $ 30,000 Comp, $15,000 deferral, $1,800 regular match + $1,800 catchup match, 6% of comp

[WDIK]

but I have a client that allows participants to make catchup contributions throughout the year, at a dollar amount per payroll period.

I may be putting my foot in my mouth, but isn't it necessary to reach an appropriate statutory or plan threshold before a deferral can be characterized as a catchup contribution?

[JDuns]

Can we, should we, have ADP combine the regular deferral and the catchup into one field and then calculate a match on that field?

In my opinion you can and you should.

As you cited, the BRF exception is available where a single formula applied. It is my understanding that this was drafted to avoid the problem that is triggered since catch-up contributions are not really catch-ups until a limit has been exceeded but if all deferrals were first treated as regular deferrals and then treated as catch ups and catch-ups were not matched, it would not be possible for a participant to maximize both his available deferral and company match.

In the formula you describe, I think you would need to test the catch-up match as a possibly (probably?) discriminatory BRF.

[Tom Poje]

I would agree with WDIK.

you can't simply 'assume' one can make a catch up.

suppose the ee quits, then what, you reclassify how you were doing things. and what if you dont match catch ups? now suddenly you have deferrals that were treated as catch ups, but are no longer, so they need a match.

about the only case I can imagine where you can have catch ups that early would be as follow

Jan pay = $1000

ee defers 60%

since plan limits deferrals to 50% then indeed ee would have a catch up.

[Guest stormfrog2000]

First, thank everyone for your thoughts. JDuns you may well be right that the current method of matching would have to be tested as a separate benefit structure. That was my concern as well with it being a discriminatory match, but you helped me crystalize how it would need to be approached.

Everyone is correct that the regs do look at the final determination of catchups on an annual basis. But the regs do specifically approve the idea of making a % of comp match and also a prorated dollar match of catchups in their discussion of universal availability. So it appears that they will let us make an estimate of catchups during the year, but make a final determination after year-end.

My client may be well advised to revisit alternative calculation methods with their payroll vendor. Since their payroll vendor is a major provider, I wonder if more plans may be exposed to a similar potential concern and not be aware of it.

[GBurns]

How do you determine that the participant is eligible for "catch up" and how do you determine the amount?

[Guest stormfrog2000]

How do you determine that the participant is eligible for "catch up" and how do you determine the amount?

In this case, if a participant, who will reach 50 by year end, wants to defer an amount that will exceed the 402(g) limit for the year, then they can specify an additional dollar amount, up to the catchup dollar limit, to be spread out over the year.

Yes, we are aware that there are other ways for a deferral to qualify as a catchup other than 402(g). But assuming that the participant does not quit during the year, this method does provide a way to make estimated catchups and spread them out over a year. (I'm sure there are other methods as well.)

[Kevin C]

The matching formula is 100% on first 6% deferred, including catchups.

Each payroll period their system calculates a match on the regular deferral field and also matches a separate catchup field up to 6% of comp each, with an aggregate annual dollar limit for 2006 of $13,200. (6% of $220,000)

How does the document define the match formula? I don't see your two statements as being the same match formula.

[Guest stormfrog2000]

The matching formula is 100% on first 6% deferred, including catchups.

Each payroll period their system calculates a match on the regular deferral field and also matches a separate catchup field up to 6% of comp each, with an aggregate annual dollar limit for 2006 of $13,200. (6% of $220,000)

How does the document define the match formula? I don't see your two statements as being the same match formula.

Kevin,

I agree. I didn't see them being the same either, hence my concern.

The first quote is the matching formula in the plan, the second is how it was interpreted and implemented on the payroll system.

The client has now changed the payroll system to calculate the match from a single data field containing all deferrals.