Catch-up Scenarios
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| Q1. | Do the special rules regarding "catch-up contributions" exempt such contributions from discrimination testing, such as ADP testing? |
| A. | Yes. Elective deferrals will be deemed to be "catch-up" contributions: |
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| Q2. | Are elective deferrals that result in excess annual additions that violate the annual additions limit of Code §415(c) included in ADP testing for a catch-up eligible participant? |
| A. | No. See the example below: |
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Assume that a catch-up eligible highly compensated employee will receive an allocation of employer contributions of $29,000 for 2003. Since the maximum allocation that the employee can receive is limited to $40,000 in total, he or she contributes elective deferrals of $11,000. He also contributes an additional $2,000 that he or she believes to be catch-up contributions for a total of $42,000. This aggregated amount includes contributions that exceed both the Code Section 402(g) limit on deferrals by $1,000 and the Code Section 415(c) limit on annual additions by $2,000. |
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| Q3. | In the example in Q2 above, are any of these "catch-up" contributions subject to ADP testing? |
| A. | Since the participant deferred in excess of the Code Section 402(g) limit, the $1,000 between $12,000 and $13,000 is clearly catch-up and will automatically be exempt from ADP testing. |
| Q4. | In the example Q2 above, what about the amount between $11,000 and $12,000 that did not exceed the Code Section 401(g) limit for 2003 but did exceed the Code Section 415(c) limit on annual additions? |
| A. | Because the participant is catch-up eligible, the excess annual addition will not be returned and is not included in the ADP test. Instead it is recharacterized as a "catch-up" contribution due to the violation of the Code Section 415(c) statutory limit. See Treasury Regulation §§1.414v-1(b)(i) and (d)(2)(i). |