Treatment of Catch-up Contributions

[Dougsbpc]

Suppose we have a top heavy 401(k) plan with 15 participants where the key employee (over age 50) made $100,000 and salary deferrals of $5,500. No employer or match contributions were made. When we run the ADP test, our system tells us he would only be entitled to $2,100 of catch-up. This would mean $3,400 would be considered non-catch up and they would fail the test. This would also create a top heavy minimum correct?

Shouldn't we be able to use the entire $5,500 as catch up not subject to ADP testing and top heavy?

[Tom Poje]

sorry, nice try but

one does not defer a 'catch-up'.

catch ups are initailly allowed for exceeding a limit - either the 402(g) limit or a plan imposed limit.

once those catch ups amounts have been determined, theADP test is run.

if the plan fails testing, then any amounts still available under the catch up limit can be treated as such.

there simply is no such option as "I can start out and treat $5,500 as catch up" in the regs. In your scenario, if you had a cap of 0% deferral limit on HCEs, then since the HCE hit the plan imposed limit, all 5,500 could be treated as catch up. this was actuall an example used in the preamble to the preliminary 401k regs. the example was removed, not necessarily because the IRS said no you can't do that, but possibly to save space. no one knows for sure.

some argue that a 0% cap means the person can't defer in the first, so they also couldn't get a catch up. that makes little sense since that means one could put a meaningless cap of 1 cent and get around that problem.

[R. Butler]

Soemthing seems wrong? Are you sure you fail the test? If you do fail the test could it be that the required refund is only $2,100 and that is why only $2,100 is being reclassifed as catch-up? If the over 50 HCE only deferred $5,500 there should not be a refund to him; that doesn't mean its all catch-up as Tom Poje explains, but you seemed concerned about a failed test when top heavy is the bigger issue.

[Tom Poje]

Mr. Butler:

I think what was hoped for was to simply treat -up front - all $5,500 as catch up. if so, then there would be no top heavty, becasue you don't count catch ups when determining what top heavy % is required in the current year. Unfortunately for the owner there is no such option available under the regs regarding catch up contributions.

[R. Butler]

Mr. Butler:

I think what was hoped for was to simply treat -up front - all $5,500 as catch up. if so, then there would be no top heavty, becasue you don't count catch ups when determining what top heavy % is required in the current year. Unfortunately for the owner there is no such option available under the regs regarding catch up contributions.

You are probably right; the post just seems worded funny. The person indicates that the $3,400 is non catch-up and that the test fails. The test fails whether $2,100 is catch-up or whether all $5,500 is catch-up. Probably just siezed too much on that sentence. I get it though; plan sponsor wants it all catch-up so no top-heavy. Tough pill for the plan sponsor.