Compliance November 10, 2002

IRS Offers Some More Help On Catch-Ups

October 23, 2001 (PLANSPONSOR.com) ? The Internal Revenue Service (IRS) has issued proposed regulations designed to assist plan sponsors with the implementation of the new ?catch-up? contributions.

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Those contributions were provided for under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) to allow workers aged 50 and above to set aside funds for retirement above and beyond other plan and regulatory limits ? if the plan has been amended to provide for the contributions, and if the participant is otherwise eligible to make contributions under the plan.

Catching Up

Beginning in 2002, employees age 50 and older, including those who turn 50 before the end of the year, are allowed to make additional “catch-up” elective deferrals of up to $1,000 to 401(k), 403(b), SEP, SIMPLE, or 457 plans. Those contributions are not subject to limits such as those in Section 415, nor are they subject to most nondiscrimination tests, including the average deferral percentage test. They can be made even if the individual has capped out on other contributory limits.

An employer may match these catch-up contributions-but those matching contributions will be subject to the normal rules. However, none of this will be possible until the plan document itself is amended to allow for this new kind of contribution.

A Bit of Clarity

The proposed regulations attempt to address some of the particular concerns associated with implementing the new contributions.

For plan sponsors worried about how such contributions will be designated, the regulations appear to assume that catch-up contributions will be those made above and beyond other limits ? those imposed by the plan itself, statutory limits or the limits imposed by the application of nondiscrimination tests, such as the ADP test.

That determination can be made after a plan has conducted its nondiscrimination tests. The regulations also acknowledge that those determinations can be made as of the last day of the relevant year for non-calendar year plans.

For purposes of the average deferral percentage (ADP) test, catch-up contributions are ignored, with those amounts subtracted from the participant?s elective deferrals before calculating the deferral percentage.

Contributions that would otherwise