Avoiding(?) True-ups on Catch-Ups in Safe Harbor Plan?

[Guest EEC1]

I would appreciate any thoughts on this proposed administrative technique in trying to avoid the possibilty of a year end match true-up on catch-up contributions.

Situation: Safe harbor plan, permitting catch-ups, matching the first 6% of any combination of employee deferrals, after -tax contributions or Roth 401(k).

Safe Harbor plans are required to match (true-up) employee elected catch-up contributions at year end if these contributions along with the employee's other contributions turn out to be less than 6% of eligible compensation.

Since the catch-up section in the plan document allows such contributions to be made in accordance with rules adopted by the Administrative Committee, I am proposing that admin committee adopt a policy that requires employees to first make a minimum 6% contribution election before being allowed to elect any amount of catch-up contribution.

Any comments or guidance on this thought would be appreciated.

Thx's EEC

[Guest Scott Foreman]

I'm afraid that I don't have an answer to your question, though I have a question of my own. This question comes not as a challenge to what you are saying, but rather a gap in my own knowledge. How can employees "elect any amount of catch-up contribution?" I thought that employee deferrals were considered "normal" deferrals until they reached the 402(g) limit. Then, any additional deferrals can be categorized as catch-up. I didn't think the employees were able to elect that categorization. It exists only as a consequence of exceeding the 402(g) limit, right?

As an aside, I do realize that deferrals can be re-classified as catch-up by virtue of testing, but I think that is off this particular topic.

Thank you very much for your help.

Scott

[Tom Poje]

currently the max deferral is 16,500 and max comp is 245000, so that is 6.73%

on a weekly payroll you would have 16,500 / 52 = 317.30

catch up 5500 / 52 = 105.77

so someone could elect to defer 423.07 weekly in 'anticipation' of having an amount treated as catch up.

however, if they quit before plan year end those amounts might never be treated as a catch up because they never reached the 16,500.

since to max out on deferrals would take 6.73% - and that is with max comp, I don't see how the 6% issue would ever come into play - unless you are also excluding some type of comp.

I suppose you might be trying to avoid situations in which someone deferred 0 part of the year and then maxed deferrals , but you could always match on a payroll basis and avoid that.

[Guest EEC1]

currently the max deferral is 16,500 and max comp is 245000, so that is 6.73%

on a weekly payroll you would have 16,500 / 52 = 317.30

catch up 5500 / 52 = 105.77

so someone could elect to defer 423.07 weekly in 'anticipation' of having an amount treated as catch up.

however, if they quit before plan year end those amounts might never be treated as a catch up because they never reached the 16,500.

since to max out on deferrals would take 6.73% - and that is with max comp, I don't see how the 6% issue would ever come into play - unless you are also excluding some type of comp.

I suppose you might be trying to avoid situations in which someone deferred 0 part of the year and then maxed deferrals , but you could always match on a payroll basis and avoid that.

Unfortunately participants can elect any combination of 401(k), roth 401(k), after-tax and if age 50, a dollor or % amount toward catch-up. In the extreme case someone could elect catch-up and nothing else. To avoid year end testing and true-up, I would rather prevent on the front end by not allowing catch-ups unless a minimum of 6% is elected. There seems to be a concern whether this is a permissable technique or not.

Thanks. EEC

[rcline46]

It is NOT permissible to elect catch up only. About the only time you would be matching on a catch up is if the match extended beyond 6%, OR

if you are able to allocate (a la new comp) the maximum $ amount to a person, and then the deferral becomes a catch up due to failure of 415.

As mentioned earlier, it is certainly possible to have a per pay deferral which will exceed the 402(g) limit at the end of the year, and if pay is large enough, it will be matched. However, when the match is cut off when the 417 limit is reached, and deferrals continue, at the end of the year you will not actually be matching the catch up.

[Guest EEC1]

This is in response to Scott's post. You are right catch-ups don't become catch-ups until 402(g) is reached and that information is provided to participants when they make their contribution elections. Normally, participants plan their contributions with 402(g) in mind and determine in addition what level of catch-up they want. However, with the plan in question, participants are allowed to elect their normal contribution level independently from catch-ups. At year end if the 402(g) limit is not reached, elected 401(k) and roth 401(k) catch-ups become normal contributions.

My problem is dealing with someone that does not elect at least 6% (to earn the full SH match) but at the same time elects to make catch-ups. This causes a special year end, plan wide test to determine the improperly contributed catch-up contributions and how much should have been matched. This is a situation I was trying to avoid by requiring participants to elect at least 6% before being able to elect the separate catch-up contribution, if pemissiable.

Thx's EEC

[K2retire]

Employees elect to defer or not. Whether or not it is a catch up contributions depends on reaching some limit, not an employee election.

[GMK]

My problem is dealing with someone that does not elect at least 6% (to earn the full SH match) but at the same time elects to make catch-ups. This causes a special year end, plan wide test to determine the improperly contributed catch-up contributions and how much should have been matched.

Even those who defer 6% won't have any catch ups. See the numbers in Tom Poje's post (#3, above).

I don't see any way you can avoid the year end calculations to determine which participants actually contributed catch ups and how much. No matter that the election forms list deferral and catch-up election choices and no matter what participants think they have elected, their deferrals must exceed 402(g) before there are any catch-ups. Read posts #5 and #7 again, carefully.