Final Regulations on Catch-up Contributions
Rev. 07/10/03, E-mail Alert 2003-13

On July 7, 2003, the IRS released final regulations on catch-up contributions. Catch-up contributions were created by EGTRRA and became available for the first time in 2002 under the newly created IRC Section 414(v). The regulations are applicable to contributions beginning on or after January 1, 2004. Generally, there were no significant changes to the proposed regulations on catch-up contributions. The proposed regulations were retained as is, but with a few alternatives and clarifications added. Thus, the attached article on catch-up contributions is provided as a refresher on catch-up regulations.

In addition to reinforcing the principles of the proposed regulations, the final regulations offer a number of alternatives to help solve issues raised in the comments to the proposed regulations. There are also some clarifications such as matching not being required on the catch-up. New and/or clarified rules are in italics.

Some of the alternatives are rather lengthy. A synopsis follows in the order and by the letter categories referenced in the regulations. The final regulations are available via a link at the bottom of this page.

A. Eligibility for Catch-up Contributions

The proposed regulations rule is retained:

• A participant otherwise eligible to make elective deferrals under the plan, and who would attain age 50 or older before the end of the calendar year.
  
  
• For non-calendar year plans, a participant is catch-up eligible as of January 1 of the calendar year in which the participant reaches his or her 50th birthday.

B. Determination of Catch-up Contributions

The proposed regulations structure is retained meaning there are still the three methods of creating a catch-up, i.e.:

• Exceeding the 402(g) limit.
  
  
• Exceeding the employer provided plan limit on elective deferrals.
  
  
• Exceeding the ADP limit.

Determination of catch-up as of the end of the plan year is retained.

Regarding the plan limit, the regulations state:

In response to comments, the IRS clarified that the employer may not use an administrative procedure to set a plan limit on elective deferrals. A qualified plan limit on elective deferrals must be a definite written program providing a definite predetermined formula for allocating contributions and thus, the limit must be in the plan document.

Payroll by payroll catch-up determination versus plan year basis of determining catch-up.
The IRS retains the annual method to prevent potential abuse associated with the payroll-by-payroll method such as a plan providing a 1% compensation limit in the early part of the year and then a 15% limit for the rest of the year. For plans that change the deferral limit during the year, the weighted average may be used and the ADP definition of compensation may be used. This will simplify the recordkeeping. Additionally, the IRS has created an alternative for plans that use a different definition of compensation for elective deferrals and for ADP testing and have an employer-provided limit.

C. Treatment of Catch-up

Retained rules:

• Catch-ups due to exceeding plan or statutory limit are excluded from ADP testing.
• Amounts in excess of a limit are treated as a catch-up contribution up to the catch-up limit.
• Excess contributions treated as catch-up contributions remain excess contributions for purposes of 411(a)(3)(G) which permits a matching contribution to remain and not be forfeited if the contribution to which the matching relates is treated as an excess deferral or excess contribution.
• Matching
  • Plan is permitted to forfeit matching on excess contributions treated as catch-up. The plan does not have to forfeit the match provided 401(a)(4) passes.
  • A plan does not fail 401(a)(4) if it allows elective deferrals and matches on all deferrals regardless of whether it is a catch-up or not, provided all matching is part of the ACP testing, including matching on catch-up.
  • Employer provided plan limit situation where matching is done on a payroll-based formula but matching on catch-up is not desired. IRS and Treasury state they believe that the desired goal may be achieved as exemplified in the following: elective deferrals not to exceed 10% of compensation for each pay period, the matching contributions will be made based on elective deferrals that do not exceed 10% of compensation for that period and do not exceed 402(g) and that matching contributions on elective deferrals in excess of the ADP limit will be forfeited, with the assurance that the plan will not be matching catch-up contributio

D. Universal Availability

Collectively bargained employees and nonresident aliens are excluded from the universal availability requirement.

E. Participants in Multiple Plans

Proposed regulations retained:

• All elective deferral plans are coordinated for one catch-up amount total with the exception of 457 eligible governmental plans.
• Employer-provided limits apply only to the plan that provides the limit. Catch-up may be reached on the plan with the employer limit. Additional elective deferrals up to the 402(g) limit may be made to the other plan without the employer limit.
• For a participant eligible under more than one plan of the same employer, catch-up may be determined in any manner that is consistent with the manner in which amounts were deferred to a plan.

F. Excludability of Catch-up Contributions

A catch-up eligible participant who is in two or more plans of two or more employers, and does not exceed the catch-up threshold in either plan, may nonetheless exceed the 402(g) when combining the elective deferrals made to all plans of all employers. In such a case, a participant may exclude from gross income elective deferrals that exceed the 402(g) limit even though neither plan treats those elective deferrals as catch-up contributions. The regulations state that this will not have any effect on either employer’s plan. The participant’s W-2 from each employer would reflect the elective deferrals which, when totaled, would exceed the 402(g) limit.

Final Regulations on Catch-up Contributions

Bill Grossman, QPA