HCE and Catch-up

[Guest think2much]

My company just imformed me that I'll be considered an HCE in 2008 and that the company's 401(k) plan limits an HCE's contribution to 10%. I am a 50+. I wonder how the 10% HCE limit will affect my catch-up election.

From what I have read, deferrals are treated as catch-ups only when a limit has been violated. This is how I see my situation:

1) Since I will not be allowed to defer more than 10% per payroll, I will not exceed the plan imposed limit.

2) Since my gross pay will be less than $155,000, I will not exceed the regular $15,500 limit (at a 10% deferral rate).

3) If the company passes ADP testing, I will have $0 catch-up.

4) If the company fails ADP testing, my excess deferrals to be recharacterized as catch-up may or may not reach $5,000.

Am I analyzing this correctly? Is there a way that I can max out my catch-up for sure?

Thanks in advance for any advice.

[Mike Preston]

Your conclusions are correct if your theory about how the plan operates is correct. Focus on the 10%. That is a plan imposed limit. If payroll will allow you to defer more than the plan imposed limit of 10% then all deferrals in excess of that 10% limit become catch-ups. Some plans allow an election of both deferrals (10%) and then, if one elects the maximum, an additional amount not to exceed the catch-up limitation for the year.

But if the plan doesn't allow it, you can't force them to take it.

[Guest think2much]

Your conclusions are correct if your theory about how the plan operates is correct. Focus on the 10%. That is a plan imposed limit. If payroll will allow you to defer more than the plan imposed limit of 10% then all deferrals in excess of that 10% limit become catch-ups. Some plans allow an election of both deferrals (10%) and then, if one elects the maximum, an additional amount not to exceed the catch-up limitation for the year.

But if the plan doesn't allow it, you can't force them to take it.

Thanks for the reply. I'll double-check with payroll, but I don't think they will allow me to defer more than 10%.

When you say "some plans allow an election of both deferrals (10%)", do you mean concurrent deferrals, i.e., 10% regular and 10% catch-up for the same pay-period?

If payroll doesn't allow more than 10% and doesn't allow concurrent deferrals, then it seems I won't reach the point for catch-ups unless I make more than $155,000. For example, if my gross pay is $120,000, I would have deferred $12,000 by year-end, with no more pay-periods for catch-ups. Correct?

[Tom Poje]

A plan MUST allow you a chance to make catch-up contribution, otherwise it fails 'universal availability'.

the preambe to the final regs words it as follows:

"Catch-up eligible participants do not have an effective opportunity to make catch-up conttributions unless the applicable emploer plan permits each catch-up eligible participant to make sufficient elective deferrals during the year so that the participant has the opportunity to make elective deferrals up to the otherwise applicable limit PLUS the catch-up contribution." then there are examples of how a plan could operate within the guidelines.

thus, if, as Mike suggest a possibilty, that the plan "doesn't allow it, you can't force them to take it" then the plan is in clear violation of universal availability. this could mean disqualification or whatever else accompanies such violation.

[Mike Preston]

Tom, great catch. Think: it sounds like that portion of the regulation that Tom cited makes it mandatory that your plan allow both your 10% election PLUS an election to utilize the catch-up limit for the year. I don't have time to look up the regulation at the moment, but if what Tom cites is all that there is on the subject, then it looks like you should be able to gently convince the plan to allow you to defer your 10% plus the catch-up limitation for the year.

However, with that said, there are circumstances where there might be exceptions and your plan might fit into one of them. For example, your plan's Administrator might have an opinion from their lawyer saying that the provision Tom cited doesn't apply for some arcane reason that I can't fathom at the moment. Hence, while I suggest you approach them with a request, don't take what is said here as complete research on the issue, because without being familiar with the plan itself, and its history, no one can be sure about what is required and what isn't required.

Good luck and let us know what happens when you run this up the flag pole.

[BG5150]

Does this plan even allow for catch-up for other employees?

I didn't think it was mandatory for a plan to have that feature.

[Kevin C]

Plans are not required to allow catch-up contributions. But, if they do allow catch-up contributions, then the universal availability rule Tom referred to applies.

In your plan's case, if someone age 50+ who makes $230,000 for 2008 will be able to defer up to $20,500 for 2008, then they are required to allow you to contribute up to 10% of pay plus the $5,000 catch-up.

[BG5150]

In your plan's case, if someone age 50+ who makes $230,000 for 2008 will be able to defer up to $20,500 for 2008, then they are required to allow you to contribute up to 10% of pay plus the $5,000 catch-up.

I would think that anyone who was making at least $155,000 could defer $20,500: $15,500 is 10% plan max and then $5,000 catch-up.

Catch-up is allowed when a participant hists one of three "limits": 1) 402(g) limit; 2) if deferrals are limited due to ADP test; 3) a plan-imposed limit on % of pay.

[Kevin C]

I would think that anyone who was making at least $155,000 could defer $20,500: $15,500 is 10% plan max and then $5,000 catch-up.

That's correct IF the plan allows catch-ups and IF they are administering the plan imposed limit correctly.

think2much needs to find out if the plan allows catch-ups. I used $230,000 of compensation in my example because that takes the plan imposed limit out of the picture. If they allow one eligible person to make catch-ups, then everyone eligible must be able to make catch-ups.

I will be very surprised if the plan in question does not allow catch-ups. But it is possible that they don't allow them.

[Guest think2much]

think2much needs to find out if the plan allows catch-ups.

Yes, my company 401(k) plan does allow catch-ups and I have been taking advantage of that. There is not a separate election form -- when 401(k) deductions capped at $15,500, I would email the payroll dept about wanting to do catch-up, and the deductions would resume at the same % until maxing out at $5,000. That's how it worked so far.

I'll be treated as an HCE for the first time next year, hence the original post. Thanks for everybody's input. I'm still waiting for a reply from payroll.

[Kimberly S]

If the plan does not have an actual limit written into it (as the prior responses seem to assume), but is merely telling HCEs to limit their contributions to 10% based on the ADP test results from last year, this conversation changes.

Without a 10% plan limit, the contribution does not become a catch up until it hits the 402(g) limit or the ADP test fails. Because of the peculiar way that ADP corrections are calculated, it could end up that someone else gets hit with a refund and your $5,000 over 10% of your pay is still fully counted toward the test that causes the need for the refund.

[Guest think2much]

Finally, I got an answer from payroll. Yes, the catch-up deferral can be done concurrent with the 10% HCE deferral.

Thanks to everyone for posting and sharing. Happy holidays!

[MoShawn]

We are considering adding a plan imposed limit on HCE deferrals for a plan we administer. Has anyone seen an instance where the actual percentage limit is not specifically written into the plan? Can it be stated as a formula (i.e. "the actual deferral percentage of the NHCE group from the prior plan year, plus 2%"), or even as "an amount to be determined each plan year by corporate resolution"?