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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. 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. 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. 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. Does
the catch-up contributions have to be made from payroll deductions?
Yes,
contributions must be made by payroll deduction. 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. 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. 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. 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. 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. 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, August 13, 2010 10:46 AM |
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