Catch-up Contribution/Plan Imposed Limitation

[Guest John Comelately]

I have a Top Heavy plan in which all the HCEs are over 50. The company does not want to make a minimum Top Heavy contribution to the plan, but the HCEs would like to make catch-up contributions to the plan.

I am looking for a nondiscriminatory plan provision, that would be considered a "Plan Imposed Limitation" on voluntary contributions under Reg. 1.414(v), that would allow the HCEs to make the full $5,000 contribution to the plan as catch-up contributions (which as catch-up contributions would be excluded from the minimum Top Heavy contribution calculation).

A provision that would work would be: "In any plan year in which there are NHCEs in the plan, HCEs are precluded from making and voluntary contributions to the plan." Since the HCEs are precluded from making voluntary contributions to the plan, any contribution they make (up to the limit) would be a catch-up contribution because it exceed a plan imposed limit.

Does this seem reasonable? Do you have a better "Plan Imposed Limitation" provision?

Thank you for your help.

[rcline46]

I fail to see how such a provision allows the HCE to make ANY contribution, of which a catch-up is a contribution. So my vote is that it cannot be done.

[Guest John Comelately]

I fail to see how such a provision allows the HCE to make ANY contribution, of which a catch-up is a contribution. So my vote is that it cannot be done.

Presumably, the plan has to also have the required provisions to allow for catch-up contributions.

So, if the plan allows for catch-ups for all employees, but precludes other voluntary contributions for HCEs, does that change your vote?

[rcline46]

There are 4 conditions for a catch-up. You are working with a plan imposed limit. If you do not permit elective deferrals, and a catch-up IS an elective deferral, how can you just contribute a catch-up? That is the catch-22 on a catch-up.

[Guest Pensions in Paradise]

The way to do this is to permit elective deferrals for all participants but set the deferral limit for HCE's at 0%. Thus, any deferral made by an HCE is automatically treated as a catch-up contribution, since it exceeded the 0% limit. This is discussed in the ERISA Outline Book. And for those who may be wondering, yes we have received favorable determination letter on such a plan.

[rcline46]

PIP - I agree you can get an FDL on a plan which incorporates catch-up contributions, and states that the deferral limits for HCEs are 0%. There is nothing intrinsicly wrong with such language.

The larger question is did you ask for a specific ruling on whether under this document, if an HCE actually made a deferral that it would be considered a catch-up? This might have to be resolved with an audit or a Private Letter ruling. In the ERISA Outline Book, did Sal give a specific reference where this would be permitted, or was it just an editorial comment?

It would appear (for now) that you, and many others, ASSUME this is the result that would be blessed by our friends at the IRS. I would not permit a client to do this unless the signed a full disclosure, hold harmless letter.

[Guest mjb]

If only the catchup is involved why not have each HCE contribute 5K to an IRA for 06 (since they are all over 50) and then rollover the funds to the Q plan next yr? Alll of the issues discussed disappear. I have a problem with allowing catch up deferrals by HCEs in a plan that provides for 0% deferral limit b/c the IRS could interpret the 0% to mean that no HCEs are eligible to make any deferrals. I would interpret any provision that prohibited HCEs from making any voluntary contributions to prevent any catch up contributions which are voluntary salary deferrals. Better to go the IRA route which is not subject to ambiguity.

[Guest Pensions in Paradise]

ok then, set the HCE deferral limit at $1.

[Guest mjb]

I dont understand why you wont admit that the best solution is to make a 5k contribution to an IRA which is a no brainer from a compliance point of view rather than making some miminal contribution to all non HCEs with all of the attendent adm. issues. same $ will be contributed w/same tax deduction for HCEs.

[Mike Preston]

It might have something to do with the fact that the catchup limits for IRA's are very well understood.