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The Basics On The New Catch-Up Contributions Allowed In 401k Plans  

Among the many important new pension reform provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), one is generating many questions. The catch-up contribution provision provides that, effective for plan years starting on or after January 1, 2002, 401k plans may permit participants age 50 and over to make additional "catch-up" contributions.

The contribution will be $1,000 in 2002, then increased each year by $1,000 until $5,000 in 2006, and then indexed in $500 increments.

We have put together the answers to some of the most common questions we have been getting regarding the catch-up provision.

QUESTIONS

What is a catch-up contribution?

A catch-up contribution is any elective deferral made by an eligible participant that is in excess of the statutory limit ($11,000 in 2002), an employer-imposed plan limit, or any limit applied in order for the plan to satisfy the ADP nondiscrimination test for the year. Back to Top

Have all the States changed their tax laws to conform with the catch-up provisions of EGTRRA?

No, not all states conform. Click here for a current (as of July 26th) state-by-state update on which states will be following the 401k "catch-up" provisions of EGTRRA. Massachusetts now conforms, leaving only three states -- Wisconsin, North Carolina and Arkansas -- to go. Back to Top

Are we required to provide this additional elective deferral to our plan participants?

No, a plan is generally not required to provide for catch-up contributions. Back to Top

If we want to offer the catch-up provision, does our plan have to be amended?

There is a high likelihood that your plan will need to be amended in order for you to allow catch-up contributions. The IRS has provided model amendment language that can be used, but you should immediately check with your legal counsel or recordkeeper on what your specific plan needs. As a general rule, a plan should be amended before allowing participants to make any catch-up contribution, but as long as the plan is amended by the end of the 2002 plan year, the plan should be able to demonstrate good faith compliance. Back to Top

Does the catch-up contributions have to be made from payroll deductions?

Yes, contributions must be made by payroll deduction. Back to Top

Does the employer have to match these catch-up contributions?

No, an employer does not have to match these contributions. If you don't match, it would be wise to communicate this to your plan participants. Back to Top

Do we need to show these contributions separately on W-2 forms?

No, the IRS has indicated that regular and catch-up contributions can be reported together on W-2 forms. Back to Top

How will catch-up contributions impact plan testing?

Among other testing issues, catch-up contributions are not considered when doing the ADP test and they are not considered in determining the amount of the minimum contribution required for a top-heavy plan. Back to Top

How are these contributions treated for hardship withdrawals, loans or distributions purposes?

Catch-up contributions to a plan are treated for plan purposes as any other pre-tax contribution would be. For example, catch-up contributions would be treated as any other elective deferral when calculating available balances for loans. Back to Top

If one of our plans permits catch-up contributions to be made, do all of our plans have to permit them?

Yes, if one plan of an employer permits catch-up contributions to be made, then catch-up contributions must be permitted in all plans of the employer permitting elective deferrals ("universal availability" requirement). IRS Notice 2002-4 provides that a plan will not fail to satisfy this requirement if plans in a controlled group adopt catch-up contributions beginning on different dates in 2002, so long as all of the plans in the controlled group adopt catch-up contributions by October 1, 2002. Back to Top

What other issues do I have to think about if we want to offer this provision?

Actually allowing catch-up contributions within the plan may be the easy part. The harder part may be the implementation. For example, can your payroll system handle the raised minimum ($12,000 vs. $11,000) for eligible participants? Can payroll segregate catch-up contributions from other pre-tax deferrals? Can the plan recordkeeper handle this type of contribution? Are there additional costs involved? How will you communicate this new benefit to your employees, or how will you respond to employees if you don't offer it? How will you train your staff to answer questions related to it? Do forms and other operational issues need to be addressed or changed?  Back to Top

 

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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last reviewed and/or updated on Friday, July 03, 2015 05:21 PM

 

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