How does a catch-up contribution work when there is an ADP test failure and money has to be returned to catch-up-eligible employees? Do you automatically make a catch-up contribution to anyone over 50?
Rev. 04/01/04, E-mail Alert 2004-7

No, the ADP test-leveling process must be followed. If the person who is being leveled is catch-up eligible and has not reached the catch-up limit for the year, then the excess is required to be recharacterized in an amount up to the catch-up limit.

For example, if the individual being leveled has $3,800 to be returned from the 2003 test and is catch-up eligible but has made no catch-up contribution, then $2,000 (the maximum catch-up for 2003) of that excess contribution would be recharacterized as a catch-up contri-bution. The remaining $1,800 would be returned as an excess contribution.