Catch-up Eligible

I feel this is a very basic question, but still want a more professional explanation: To become catch up eligible, does the participants need to max out the 402g limit?

My understand is: to be eligible for catch up contribution, the participants need to meet the age requirement and max out the 402g limit. However, SPD indicated if you reach age 50 during the year, you can contribute catch up contribution anytime(people interpret this as no requirement for max out 402g because if the contribution is by paycheck, most employee won't max out at the 1st paycheck). This caused a lot of employees able to select a % for both contribution at 1st day of the calendar year they become age 50, and they may not max out the 402g limit at the year end.

Plan is a calendar plan and catch up is not matched.

40 minutes ago, Sarah73 said:

To become catch up eligible, does the participants need to max out the 402g limit?

No. Attaining age 50 in the calendar year (or already age 50+) makes an individual catch up eligible. However, a contribution is not recharacterized as a catch up until a limit is exceeded (e.g., 402g, plan imposed limit). In this case it would appear the "catch up" election should be matched until it actually becomes a catch up. 

There is a large difference in how the regulations define "catch-up contributions" and how everyone else frequently uses that term when payroll has a separate contribution source for catch-up contributions.  It creates confusion.

1 hour ago, WCC said:

No. Attaining age 50 in the calendar year (or already age 50+) makes an individual catch up eligible. However, a contribution is not recharacterized as a catch up until a limit is exceeded (e.g., 402g, plan imposed limit). In this case it would appear the "catch up" election should be matched until it actually becomes a catch up. 

TPAs recharacterize the catch up is commonly happens when the calendar year is complete and start the compliance testing. How should plan sponsor operates the plan or how should payroll set up to match it? Since the Catch up is not matched, participants didn't max out 401k but start catch up contribution will lose a portion of match. And the match made by payroll, it is not required to have a true up at year end to make up the match difference.

If the participant doesn't even get into catch-up amounts, tell the employee to change the deferrals to no catch-up.

As MWeddell said, it creates confusion.

1 minute ago, Mr Bagwell said:

If the participant doesn't even get into catch-up amounts, tell the employee to change the deferrals to no catch-up.

As MWeddell said, it creates confusion.

It is a large plan, hard to educate the participants one by one and monitor them when they turn to age 50. Any suggestion of the set up can be implement on the TPA side or payroll side?

Yes.... but it won't work.

Tell the Provider to stop offering Catch-Up selection.

You said it's a large plan... can you get any traction if the auditor "found" (with your help) participants that are not getting the correct amount of match?  They put a nice little finding on the 5500-audit package. 

If no fix is done, seems like you have a not operating according to the plan

Ideally, the payroll provider should know that employee A is not into catch-up and should be getting match.  Even if have Catch-Up "selected"....

2 minutes ago, Mr Bagwell said:

Tell the Provider to stop offering Cath-Up selection.

This.

We have done this many times with one specific large record keeper. A participant has one election on file, if the participant is catch up eligible, then the payroll system is set up to continue to withhold until they reach 402g + catch up. 

2 minutes ago, WCC said:

This.

We have done this many times with one specific large record keeper. A participant has one election on file, if the participant is catch up eligible, then the payroll system is set up to continue to withhold until they reach 402g + catch up. 

Wow!  They actually listened?  That's awesome!

2 hours ago, Sarah73 said:

SPD indicated if you reach age 50 during the year, you can contribute catch up contribution anytime(people interpret this as no requirement for max out 402g

That is an incorrect interpretation. As discussed, deferrals become catch-ups after a limit (402(g), plan imposed, or ADP test restricted) is reached, not simply by election. By "people" do you mean participants or service providers? The latter group should know better.

The SPD wording means (if drafted by a knowledgeable person, or platform) that you are eligible for catch-up deferrals if you attain age 50 at any time during the year, not simply after reaching age 50. Whether I turn 50 on 1/1/2022 or 12/31/2022 I can defer $27,000 in total in 2022, and do so all in Q1 if able or spread throughout the year. The SPD could possibly be worded with more clarity, but the administrative system providers (payroll and RK) should know how to do this properly.

49 minutes ago, Sarah73 said:

It is a large plan, hard to educate the participants one by one and monitor them when they turn to age 50. Any suggestion of the set up can be implement on the TPA side or payroll side?

The only problem (of which I am aware) is when:

- Plan document permits catch-up contributions to be made and defines "catch-up contributions" in accordance with the regulations.

- Plan document specifies that catch-up contributions are not matched but allocates a matching contribution based on other elective deferrals.

- Employee elects to contribute to a catch-up contribution source separate from his / her election to make other elective deferrals.

- Matching contributions are based on what payroll initially thinks are and are not catch-up contributions, not based on what actually turn out to be catch-up contributions once the year ends and compliance testing & monitoring is performed.

- There is no process to grant or remove matching contributions based on what turns out to officially be catch-up contributions.

So just avoid any of those five conditions.  I would counsel the client to calculate the match based on all elective deferrals including "catch-up contributions."  I also like NOT having separate employee elections for catch-up contributions, although that change requires payroll programming, so it's less friction free.  Others in this thread seem to be advising clients to not permit catch-up contributions to be made, which strikes me as a huge overreach.

* * * * *

It sounds like you are concerned about eligible employees electing to make "catch-up contributions" (as unofficially defined by payroll, not as officially defined in the regulations) before they have reached the 402(g) limit or any other legal or plan limit.  This is a non-issue.  If the eligible employee has not reached a limit, then the extra contributions that payroll thought were "catch-up contributions" are not actually catch-up contributions and your client has not violated the regulations.

To be clear, I'm not saying "tell the employee to not have catch-ups".  

26 minutes ago, MWeddell said:

I also like NOT having separate employee elections for catch-up contributions

we are in agreement.

29 minutes ago, MWeddell said:

Others in this thread seem to be advising clients to not permit catch-up contributions to be made, which strikes me as a huge overreach.

I agree with you and want to clarify my comments if they sounded like I was suggesting to amend the document and remove catch ups all together. I prefer one election as well, so we have advised clients to turn off the erroneous "catch up election" on the record keepers website. Or if it is not turned off, the payroll system needs to add the elections together to calculate the match. 

That makes sense.  Thanks for the clarifications.

23 hours ago, MWeddell said:

Others in this thread seem to be advising clients to not permit catch-up contributions to be made, which strikes me as a huge overreach.

I don't think anyone is advising that - just advocating for proper accounting for matching contribution purposes. As Frankenstein's monster said, "fire bad, catch-up contribution good!"

All good ideas.  I usually argue (persuasively) that it makes no sense to not match catch-up.   The match cap should limit the plan sponsor's financial exposure, if that is their concern.

1 hour ago, Patricia Neal Jensen said:

All good ideas.  I usually argue (persuasively) that it makes no sense to not match catch-up.   The match cap should limit the plan sponsor's financial exposure, if that is their concern.

I agree.  I work for an employer that matches 100% of 6%, no match on catch-up, with an annual true-up.  What does this mean?  Really nothing.  The employer thinks they are not matching on catch-ups, and therefore, saving them some money.  This is true and misleading in concept.    20,500 divided by 305,000 is 6.72%.  Adding catch-up in only increases the deferral %, still capping at 6%.  Less compensation and more deferrals is only going to get you the cap of 6% match which Patricia alluded.   Keep it Simple comes to mind.  I've seen this confuse employees thinking they are getting the short end of the stick.  While in reality, if they defer 6%, they will get 6%.

...right, the problem is compounded if an ADP refund turns non-catchups into catchups even though they're below 6% of salary.  Now the previously matched amounts are ineligible to be matched as a result of the re-characterization.