Catch UP Contribution

[Pammie57]

I just had a client email me with this question:

"I am trying to find out if Catch-Up contributions can be changed anytime during a plan year. I found where we elected to have Catch-Up contributions, but find nowhere that states a specific date if someone should want to increase or decrease their Catch-Up contribution. Is it correct to say that a Catch-Up contribution amount can be changed at anytime through a plan year?"

The plan document says " Participants may modify deferral elections on 1st day of PY and 1st day of 7th month of PY" -

What I am not sure of is how they would specifically modify the catch up amount - just reduce their percentage or dollar amount for all deferrals? What am I missing here?

[Mike Preston]

Catchups are just deferrals.

[Pammie57]

Yep I realized after I posted that she can't single out catch-up -...would have to change deferral percentage or change amount per paycheck on the 1/1 or 7/1 date to reduce total deferrals.

[GMK]

Some forms provide for separate elections for deferrals and catch-ups. (I have no idea why.)

It is effective in confusing participants, so we made our own election change form.

[Mike Preston]

True, but in reality they are designed to have separate elections for deferrals and for catch-up deferrals on one form and at one time. The key is that both are deferrals and a change in either is effected via a new deferral election form. The original question was whether a plan that allowed deferral election changes at specific times during the year can provide for catch-up deferral election changes more frequently. I'm pretty sure there is a prohibition on doing it that way.

[austin3515]

They have separate elections because (and this is even worse) payroll companies have diferent deduction codes... Why why why?? So now hte payroll company is coding contriubtions as catch-ups even though in total contriubtions might only $10,000. Then the ______'s of the world will exclude those amounts from the ADP test because they're catch-ups.

Then you've also got participants who are 50 who elect to contriubtion 45% of pay and who get capped at $18,000. Why? Because they didn't prepare separate catch-up election.

Why indeed...

The only good thing that comes out of it is if I'm trying to manage an ADP test, I will tell a client to contribute their testing limit as a percentage, and divide their 5,500 of catch-ups over 26 pay-periods.

[Mike Preston]

What was left unsaid is that a deferral election form that includes separate elections for regular deferrals and catch-up is that these sort of electable catch-ups are, by definition, related to a plan limit being exceeded, not a general limit being exceeded. That is why payroll companies have a code of "catch-up deferral" available. In the absence of a plan limit being exceeded there is no way that a payroll clerk can know that a deferral goes in as a catch-up.

In the case where there is a "testing limit" (I assume a plan that uses prior year NHCE ADP to determine this year's ADP limit for HCE's), as Austin suggests, the division of the 5,500 over 26 payroll periods does NOT result in the $211.54 of deferrals in the first payroll being a catch-up. The last $5,500 for the year is a catch-up because the ADP limit (even if known in advance) isn't a plan limit. Right?

[austin3515]

In the case where there is a "testing limit" (I assume a plan that uses prior year NHCE ADP to determine this year's ADP limit for HCE's), as Austin suggests, the division of the 5,500 over 26 payroll periods does NOT result in the $211.54 of deferrals in the first payroll being a catch-up. The last $5,500 for the year is a catch-up because the ADP limit (even if known in advance) isn't a plan limit. Right?

What I mean is, sometimes we tell the whole group of HCE's, the max you can do is 5% of pay, plus the 5,500 in catch-ups. So they elect 5% of pay for regular deferrals, and $211.54 in catch-ups each pay-period. By year-end, guess what? The HCE has followed instructions perfectly. The catch-up payroll deduction code really does equal actual catch-ups. The 5% cap is the plan imposed limit imposed by the ADP Testing section where we can limit HCE's administratively to prevent a failure.

[Mike Preston]

Sigh.

[austin3515]

I'll try not to read too much into that sigh...

[Mike Preston]

What you have described is simply not a plan imposed limit, IMO. I'm not saying the technique of administratively limiting HCE's to avoid an ADP failure is bad. It isn't. It's good. But that doesn't impact what is and is not a catch-up.

[austin3515]

No actually it is definitely a plan imposed limit. The PLAN says I can impose a cap on HCE's to pass testing. This is pretty well documented, I didn't come up with it on my own.

[Mike Preston]

I already said the practice is a good one. I found some support for your position in the ABA Q&A from 2003, so while I don't think the IRS would agree *TODAY*, they appeared willing in 2003. I suppose as long as the limitation remains the same for an entire plan year, nobody will complain. I still think that if presented with a bad fact pattern, like a manipulative Plan Administrator that changes the limit for the benefit of a small number of HCE's, the IRS will NOT treat it as a plan imposed limit.

[austin3515]

Another lively discussion on the same topic. This one includes the EOB section, which references the 2003 Q&A you mentioned.

http://benefitslink.com/boards/index.php/topic/28318-adpacp-prior-year-testing/

[Mike Preston]

The 2003 Q&A I referenced was from the ABA, not ASPA. Back then, the questions considered to be highly relevant were repeated at a few conferences to make sure the answers were shared with as many as possible. In addition to the ABA cite I gave and the ASPA cite you gave, I found this from the 2004 ASPA Annual Conference Q&A:

9. If a plan document provides that the administrative committee may

limit HCE deferrals in order to prevent ADP testing violations, and

the plan administrator takes that action through resolution and not by

plan amendment, is this considered to be an "employer-provided

limit" so that contributions in excess of this imposed limit are eligible

to be treated as catch-up contributions?

A: Yes

I note that Sal's practice tip in the thread you provided a link for seems to lean away from the administrative committee route and leans, ever so slightly, in favor of my interpretation:

"Plan practice tip. Given these comments, certainly the preferred practice would be to set forth the limit in the plan document, or at least a formula for determining such limit (e.g., HCEs are individually limited to three percentage points more than the NHC average for the preceding year)."

As with many things in pension practice there are things I personally wouldn't do but would be more than happy to defend anybody else's use. This is one of them.