Catch-up Scenarios
Rev. 01/22/04, E-mail Alert 2004-2

Do the special rules regarding "catch-up contributions" exempt such contributions from discrimination testing, such as ADP testing?

Yes. Elective deferrals will be deemed to be "catch-up" contributions:

• when they exceed the Code Section 402(g) limit or another statutory limit,
  
• when they exceed some lower limit specified in the plan document, or
  
• when a highly compensated employee is deemed to have excess contributions due to an ADP test failure.
  

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?

No. See the example below:

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.

In the example in Q2 above, are any of these "catch-up" contributions subject to ADP testing?

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.

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?

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).