[Federal Register Volume 66, Number 205 (Tuesday, October 23, 2001)]
[Proposed Rules]
[Pages 53555-53564]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-26566]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-142499-01]
RIN 1545-BA24
Catch-Up Contributions for Individuals Age 50 or Over
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations that would provide
guidance concerning the requirements for retirement plans providing
catch-up contributions to individuals age 50 or older pursuant to the
provisions of section 414(v). These proposed regulations would affect
section 401(k) plans, section 408(p) SIMPLE IRA plans, section 408(k)
simplified employee pensions, section 403(b) tax-sheltered annuity
contracts, and section 457 eligible governmental plans, and would
affect participants eligible to make elective deferrals under these
plans or contracts. This document also contains a notice of public
hearing on these proposed regulations.
DATES: Written and electronic comments and requests to speak (with
outlines of oral comments) at a public hearing scheduled for February
21, 2002, must be received by January 31, 2002.
ADDRESSES: Send submissions to: CC:IT&A:RU (REG-142499-01), room 5226,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m. to: CC:IT&A:RU (REG-142499-01),
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue,
NW., Washington, DC. Alternatively, taxpayers may submit comments
electronically via the Internet by selecting the ``Tax Regs'' option on
the IRS Home Page, or by submitting comments directly to the IRS
Internet site at http://www.irs.gov/tax_regs/reglist.html. The public
hearing will be held in the IRS Auditorium (7th Floor), Internal
Revenue Building, 1111
[[Page 53556]]
Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, R. Lisa
Mojiri-Azad or John T. Ricotta at (202) 622-6060 (not a toll-free
number); concerning submissions and the hearing, and/or to be placed on
the building access list to attend the hearing, Donna Poindexter, (202)
622-7180 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed regulations under section 414(v) of
the Internal Revenue Code of 1986 (Code). Section 414(v) was added by
section 631 of the Economic Growth and Tax Relief Reconciliation Act of
2001 (EGTRRA) (Public Law 107-16), enacted on June 7, 2001. Under
section 414(v), an individual age 50 or over is permitted to make
additional elective deferrals (up to a dollar limit provided in that
section) under a plan that otherwise permits elective deferrals if
certain requirements provided under that section are satisfied. Section
414(v) also provides that a plan will not violate any provision of the
Code by permitting these additional elective deferrals to be made.
Explanation of Provisions
These proposed regulations would implement new section 414(v) by
providing that an employer plan is not treated as violating any
provision of the Code solely because the plan permits a catch-up
eligible participant (as defined in these proposed regulations) to make
catch-up contributions. Catch-up contributions generally are elective
deferrals made by a catch-up eligible participant that exceed an
otherwise applicable limit and that are treated as catch-up
contributions under the plan, but only to the extent they do not exceed
the maximum amount of catch-up contributions permitted for the taxable
year. An employer is not required to provide for catch-up contributions
in any of its plans, even if the plans provide for elective deferrals.
If, however, any plan of an employer provides for catch-up
contributions, all plans of the employer that provide elective
deferrals must comply with the universal availability requirements
described below.
A. Eligibility for Catch-up Contributions
Under these proposed regulations, a participant is a catch-up
eligible participant, and thus is permitted to make catch-up
contributions, if the participant is otherwise eligible to make
elective deferrals under the plan and is age 50 or older. For purposes
of this rule, a participant who is projected to attain age 50 before
the end of a calendar year is deemed to be age 50 as of January 1 of
that year. The effect of this rule is that all participants who will
attain age 50 during a calendar year are treated the same beginning
January 1 of that year, without regard to whether the participant
survives to his or her 50th birthday or terminates employment during
the year and without regard to the employer's choice of plan year.
A catch-up eligible participant can make catch-up contributions
under a section 401(k) plan, a SIMPLE IRA plan as defined in section
408(p), a simplified employee pension as defined in section 408(k)
(SEP), a plan or contract that satisfies the requirements of section
403(b), or a section 457 eligible governmental plan, as long as the
participant can otherwise make elective deferrals under the plan or
contract. For this purpose, elective deferrals include not only
elective deferrals defined in section 402(g)(3), but also any
contribution to a section 457 eligible governmental plan.
B. Determination of Catch-up Contribution
In describing section 631 of EGTRRA, the Conference report states
that ``the otherwise applicable dollar limit on elective deferrals
under a section 401(k) plan, section 403(b) annuity, SEP, or SIMPLE, or
deferrals under a section 457 plan is increased for individuals who
have attained age 50 by the end of the year.'' Conf. Rep. No. 107-84,
at 236 (2001). The legislative history to section 631 of EGTRRA
indicates that the intent of Congress in enacting section 414(v) was to
allow a catch-up eligible participant to make additional elective
deferrals over and above any otherwise applicable limit, up to the
catch-up contribution limit for the taxable year. The proposed
regulations would provide that elective deferrals made by a catch-up
eligible participant are treated as catch-up contributions if they
exceed any otherwise applicable limit, to the extent they do not exceed
the maximum dollar amount of catch-up contributions permitted under
section 414(v). However, the regulations would not require that a
participant have made elective deferrals in excess of an otherwise
applicable limit in order to be a catch-up eligible participant. A plan
providing for $1,000 of catch-up contributions in 2002 could allow a
participant who is over age 50 to make elective deferrals in an amount
projected to exceed the otherwise applicable limit by $1,000 at any
time during 2002.
Under the proposed regulations, catch-up contributions would be
determined by reference to three types of limits: statutory limits,
employer-provided limits, and the actual deferral percentage (ADP)
limit. A statutory limit is a limit contained in the Code on elective
deferrals or annual additions permitted to be made under the plan or
contract (without regard to section 414(v)). Statutory limits include
the requirement under section 401(a)(30) that the plan limit all
elective deferrals within a calendar year under the plan and other
plans (or contracts) maintained by members of a controlled group to the
amount permitted under section 402(g).
An employer-provided limit is a limit on the elective deferrals an
employee can make under the plan (without regard to section 414(v))
that is contained in the terms of the plan, but that is not a statutory
limit. For example, a limit on elective deferrals of highly compensated
employees to 10% of pay is an employer-provided limit. The condition
that a employer-provided limit be contained in the terms of the plan is
intended to correspond with the requirements of Sec. 1.401-1 that a
qualified plan have a definite written program and provide for a
definite predetermined formula for allocating contributions made to the
plan.
For a section 401(k) plan that would fail the ADP test of section
401(k)(3) if it did not correct under section 401(k)(8), the ADP limit
is the highest dollar amount of elective deferrals that may be retained
in the plan by a highly compensated employee after the application of
section 401(k)(8)(C) (without regard to section 414(v)). For example,
if after ADP testing, elective deferrals by highly compensated
employees in excess of $8,000 would be required to be distributed or
recharacterized as employee contributions under the statutory
correction set forth under section 401(k)(8)(C), then the ADP limit is
$8,000. Similar rules apply in the case of a SEP.
The amount of elective deferrals in excess of an applicable limit
is generally determined as of the end of a plan year by comparing the
total elective deferrals for the plan year with the applicable limit
for the plan year. For example, if a plan limits elective deferrals to
10% of compensation, then whether the participant has elective
deferrals in excess of 10% of compensation is determined at the end of
the plan year. Similarly, elective deferrals in excess of the ADP limit
are determined as of the end of the plan year. For a limit that is
determined on the basis of a year other
[[Page 53557]]
than a plan year (such as the calendar year limit on elective deferrals
under section 401(a)(30)), the determination of whether elective
deferrals are in excess of the applicable limit is made on the basis of
such other year.
If a plan provides for separate employer-provided limits on
separate portions of compensation during the plan year, the
determination of the amount of elective deferrals in excess of the
employer-provided limit is still made on an annual basis, with the
applicable limit for the year equal to the sum of the dollar limits
that apply to the separate portions of compensation. This situation may
occur, for example, when the plan sets a deferral percentage limit for
each payroll period.
If the plan limits elective deferrals for separate portions of the
plan year, then, solely for purposes of determining the amount that is
in excess of an employer-provided limit, the plan may provide, as an
alternative rule, that the applicable limit for the plan year is the
product of the employee's plan year compensation and the time-weighted
average of the deferral percentage limits. For example, if a plan using
this time-weighted average limits deferrals to 8 percent of
compensation during the first half of the year and 10 percent of
compensation for the second half of the year, the applicable limit will
be 9 percent of each employee's plan year compensation.
Under the proposed regulations, elective deferrals in excess of an
applicable limit would be treated as catch-up contributions only to the
extent that such elective deferrals do not exceed the catch-up
contribution limit for the taxable year reduced by elective deferrals
previously treated as catch-up contributions for the taxable year. The
catch-up contribution limit for a taxable year is generally the
applicable dollar catch-up limit for such taxable year, except that an
elective deferral will not be treated as a catch-up contribution to the
extent that the elective deferral, when added to all other elective
deferrals for the taxable year under all plans of the employer, exceeds
the participant's compensation (determined in accordance with section
415(c)(3)).
These proposed regulations would include a timing rule for purposes
of determining when elective deferrals in excess of an applicable limit
are treated as catch-up contributions. This rule is necessary because
the maximum amount of catch-up contributions is based on a
participant's taxable year, but the determination of whether an
elective deferral is in excess of an applicable limit is determined on
the basis of a taxable year, plan year, or limitation year, depending
on the underlying limit. Under the proposed regulations, whether these
elective deferrals in excess of an applicable limit can be treated as
catch-up contributions would be determined as of the last day of the
relevant year, except that if the limit is determined on a taxable or
calendar year basis, then whether elective deferrals in excess of the
limit can be treated as catch-up contributions would be determined at
the time they are deferred. This timing rule is most significant for a
plan with a plan year that is not the calendar year. For example, in a
plan with a plan year ending on June 30, 2005, elective deferrals in
excess of the employer-provided limit or the ADP limit for the plan
year ending June 30, 2005, would be treated as catch-up contributions
as of the last day of the plan year, up to the catch-up contribution
limit for 2005. Any amounts deferred after June 30, 2005, that are in
excess of the section 401(a)(30) limit for the 2005 calendar year would
also be treated as catch-up contributions at the time they are
deferred, up to the catch-up contribution limit for 2005 reduced by
elective deferrals treated as catch-up contributions as of June 30,
2005.
C. Treatment of Catch-up Contributions
If an elective deferral is treated as a catch-up contribution, it
is not subject to otherwise applicable limits under the plan and the
plan will not be treated as failing otherwise applicable
nondiscrimination requirements because of the making of catch-up
contributions. The proposed regulations would provide guidance on how
catch-up contributions under the plan are taken into account for
purposes of these various requirements under the Code. Under the
proposed regulations, catch-up contributions would not be taken into
account in applying the limits of section 401(a)(30), 401(k)(11),
402(h), 402A(c)(2), 403(b), 404(h), 408(k), 408(p), 415, or 457 to
other contributions or benefits under the plan offering catch-up
contributions or under any other plan of the employer.
For purposes of ADP testing, the proposed regulations would provide
that any elective deferral for the plan year that is treated as a
catch-up contribution because it is in excess of a statutory limit or
an employer-provided limit is disregarded for purposes of calculating
the participant's actual deferral ratio (i.e., catch-up contributions
are subtracted from the participant's elective deferrals for the plan
year prior to determining the participant's actual deferral ratio).
This subtraction applies without regard to whether the catch-up
eligible participant is a highly compensated employee or a nonhighly
compensated employee. If, after running the ADP test, a plan needs to
take corrective action under section 401(k)(8), the plan must determine
the amount of elective deferrals that are catch-up contributions
because they are in excess of the ADP limit. The elective deferrals
that are treated as catch-up contributions must be retained by the
plan. The plan would not be treated as failing section 401(k)(8) by
reason of this retention of catch-up contributions. Excess
contributions treated as catch-up contributions would nevertheless be
treated as excess contributions for purposes of section 411(a)(3)(G).
Therefore, if the plan does not provide for matching contributions on
catch-up contributions, any matching contributions related to excess
contributions treated as catch-up contributions can be forfeited. The
approach under the proposed regulations would exclude those catch-up
contributions that can be identified before ADP testing, and allow the
plan to treat elective deferrals as catch-up contributions for those
participants who would be limited under the plan (because the plan
otherwise would be required to distribute some of their elective
deferrals), while minimizing changes to current plan administration.
Catch-up contributions with respect to the current plan year are
not taken into account for purposes of section 416 or 410(b). However,
catch-up contributions made to the plan in prior years are taken into
account in determining whether a plan is top-heavy under section 416,
and for purposes of average benefit percentage testing to the extent
prior years' contributions are taken into account (i.e., if accrued to
date calculations are used).
A plan does not fail the requirements of section 401(a)(4) merely
because it permits only catch-up eligible participants to make catch-up
contributions. Similarly, if a plan applies a single matching formula
to elective deferrals whether or not they are catch-up contributions,
the matching formula as applied to catch-up eligible participants is
not treated as a separate benefit, right, or feature under
Sec. 1.401(a)(4)-4 from the matching formula as applied to the other
participants. However, the matching contributions under the matching
formula must satisfy the actual contribution percentage test under
section 401(m)(2) taking into account all matching contributions,
including matching contributions on catch-up contributions.
[[Page 53558]]
D. Universal Availability
Under the proposed regulations, a plan that offers catch-up
contributions would satisfy the requirements of section 401(a)(4) only
if all catch-up eligible participants are provided with the effective
opportunity to make the same dollar amount of catch-up contributions.
Therefore, if an employer provides for catch-up contributions under a
section 401(k) plan, all other employer plans in the controlled group
that provide for elective deferrals, including plans not subject to
section 401(a)(4), must provide catch-up eligible participants with the
same effective opportunity to make catch-up contributions. This
universal availability requirement applies solely with respect to
catch-up eligible participants. Because the definition of catch-up
eligible participants requires that the participant be eligible to make
elective deferrals under a plan without regard to section 414(v), the
universal availability requirement will not require plans that do not
otherwise provide for elective deferrals to provide for catch-up
contributions.
In order to provide catch-up eligible participants with an
effective opportunity to make catch-up contributions, the plan would
have to permit each catch-up eligible participant to make sufficient
elective deferrals during the year so that the participant has the
opportunity to make elective deferrals up to the otherwise applicable
limit plus the catch-up contribution limit. An effective opportunity
could be provided in several different ways. For example, a plan that
limits elective deferrals on a payroll-by-payroll basis might also
provide participants with an effective opportunity to make catch-up
contributions that is administered on a payroll-by-payroll basis (i.e.,
by allowing catch-up eligible participants to increase their deferrals
above the otherwise applicable limit by a pro-rata portion of the
catch-up limit for the year). However, as discussed above, whether
these elective deferrals are treated as catch-up contributions would
not be determined until the end of the year.
A plan would not fail the universal availability requirement solely
because an employer-provided limit did not apply to all employees or
different employer-provided limits apply to different groups of
employees. As under current law, a plan could provide for different
employer-provided limits for different groups of employees, as long as
each limit satisfies the nondiscriminatory availability requirements of
Sec. 1.401(a)(4)-4 for benefits, rights, and features. Thus, for
example, a plan could provide for an employer-provided limit that
applies to highly compensated employees, even though no employer-
provided limit applies to nonhighly compensated employees. However, a
plan is not permitted to provide lower employer-provided limits for
catch-up eligible participants.
The proposed regulations would provide several exceptions to this
universal availability requirement. First, the proposed regulations
would provide for coordination between catch-up contributions under
section 414(v) and the provisions of section 457(b)(3) in accordance
with section 414(v)(6)(C). The proposed regulations would also provide
transition rules for collectively bargained employees and newly-
acquired plans.
E. Participants in Multiple Plans
As discussed in Section B above, the intent of section 414(v) is to
permit a catch-up eligible participant to make elective deferrals in an
amount equal to the catch-up contribution limit for the year in
addition to the amount of elective deferrals that the participant would
otherwise have been allowed to defer under the plan or plans in which
the catch-up eligible participant participated. Many of the statutory
limits that would otherwise limit the participant's elective deferrals
are applied on an aggregated basis, for example, across all plans
within a controlled group. Accordingly, the proposed regulations would
provide that, for purposes of determining whether elective deferrals
are in excess of a statutory limit, all elective deferrals in excess of
the statutory limit are aggregated in the same manner as the underlying
limit and the aggregate amount of elective deferrals treated as catch-
up contributions because they exceed the statutory limit must not
exceed the applicable dollar catch-up limit.
For example, compliance with section 401(a)(30) is determined based
on elective deferrals under all section 401(k) plans and all section
403(b) contracts sponsored by the employer. Therefore, all section
401(k) plans and section 403(b) contracts in the controlled group of
the employer would be aggregated for purposes of determining the total
amount of elective deferrals in excess of the section 401(a)(30) limit.
The amount of elective deferrals treated as catch-up contributions by
reason of exceeding the section 401(a)(30) limit under the aggregated
plans or contracts must not exceed the dollar amount of the catch-up
limit for the taxable year.
In calculating the actual deferral ratio (ADR) (as defined in
Sec. 1.401(k)-1(g)) for a highly compensated employee who participates
in more than one section 401(k) plan of the employer during the year,
all section 401(k) plans are treated as one section 401(k) plan.
Consistent with this approach, if a highly compensated employee
participates in more than one section 401(k) plan of an employer, in
determining the elective deferrals in excess of an employer-provided
limit, the proposed regulations would take into account the elective
deferrals and employer-provided limits under all section 401(k) plans
in which the employee participates. In such a case, the proposed
regulations would provide that in determining whether an employee's
elective deferrals exceed an employer-provided limit, the applicable
limit for the plan year is the sum of the dollar amounts of the limits
under the separate plans and the employee's elective deferrals under
all these plans are combined to determine if that aggregate employer-
provided limit is exceeded.
When the elective deferrals in excess of a statutory or employer-
provided limit would be determined based on more than one plan, the
aggregate amount of elective deferrals in excess of that limit made
under all section 401(k) plans of the employer in which a catch-up
eligible participant who is a highly compensated employee participates
would be treated as elective deferrals in excess of an applicable limit
under each of those section 401(k) plans. In the case of a highly
compensated employee, all elective deferrals that exceed a statutory or
employer-provided limit and are treated as catch-up contributions under
the section 401(k) plans of the employer in which the catch-up eligible
participant participates are subtracted from the participant's elective
deferrals for purposes of determining the participant's ADR. However,
if any of the section 401(k) plans corrects through distribution of
excess contributions under section 401(k)(8) in order to comply with
section 401(k)(3), only the catch-up contributions made under that plan
are permitted to be subtracted from elective deferrals for purposes of
this correction.
When the elective deferrals in excess of a statutory or employer-
provided limit are determined on an aggregated basis, it must be
determined under which plan the elective deferrals in excess of the
limit were made. The plan under which the elective deferrals in excess
of the limit were made may be determined in any manner that is not
[[Page 53559]]
inconsistent with the manner in which such amounts were actually
deferred under the plans. For example, if a catch-up eligible
participant participates in a section 401(k) plan only during the first
6 months of the year and during the second 6 months of the year, while
participating in a section 403(b) contract, the participant's
contributions reach and exceed the section 401(a)(30) limit for the
year, then all elective deferrals in excess of the section 401(a)(30)
limit for the year could be treated as made to the section 403(b)
contract.
F. Excludability of Catch-up Contributions
Catch-up contributions are generally not treated as exceeding the
applicable dollar amount of section 402(g)(1). The proposed regulations
would also provide that a catch-up eligible participant who
participates in multiple plans may treat an elective deferral as a
catch-up contribution (up to the maximum amount of catch-up
contributions permitted for the taxable year) because it exceeds the
catch-up eligible participant's section 402(g) limit for the taxable
year. This rule would allow a catch-up eligible participant who
participates in plans of two or more employers an exclusion from gross
income for elective deferrals that exceed the section 402(g) limit,
even though the elective deferrals do not exceed an applicable limit
for either employer's plan. The treatment by an individual of such
elective deferrals as catch-up contributions will not have any impact
on either employer's plan. This treatment is parallel to the treatment
of excess deferrals for an individual under age 50 who exceeds the
section 402(g) limit in the plans of two unrelated employers.
Accordingly, the proposed regulations would not provide for the ADP
test to be rerun to disregard elective deferrals that an individual
treats as catch-up contributions because they exceed the section 402(g)
limit. However, the total amount of elective deferrals in excess of the
applicable dollar limit in section 402(g)(1)(B) that are not includible
in income because they are treated as catch-up contributions cannot
exceed that limit by more than the catch-up contribution limit for the
taxable year.
Proposed Effective Date
The regulations are proposed to apply to contributions in taxable
years beginning on or after January 1, 2002. Taxpayers may rely on
these proposed regulations for guidance pending the issuance of final
regulations. If, and to the extent, future guidance is more restrictive
than the guidance in these proposed regulations, the future guidance
will be applied without retroactive effect.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and because
these regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, these proposed
regulations will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any electronic or written comments
(preferably a signed original and eight (8) copies) that are submitted
timely to the IRS. In addition to the other requests for comments set
forth in this document, the IRS and Treasury also request comments on
the clarity of the proposed rule and how it may be made easier to
understand. All comments will be available for public inspection and
copying.
A public hearing has been scheduled for February 21, 2002, at 10
a.m. in the IRS Auditorium (7th Floor), Internal Revenue Building, 1111
Constitution Avenue NW., Washington, DC. Due to building security
procedures, visitors must enter at the 10th street entrance, located
between Constitution and Pennsylvania Avenues, NW. In addition, all
visitors must present photo identification to enter the building.
Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 15 minutes before the hearing
starts. For information about having your name placed on the building
access list to attend the hearing, see the FOR FURTHER INFORMATION
CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
Persons who wish to present oral comments at the hearing must
submit written comments and an outline of the topics to be discussed
and the time to be devoted to each topic (signed original and eight (8)
copies) by January 31, 2002.
A period of 10 minutes will be allotted to each person for making
comments.
An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the
agenda will be available free of charge at the hearing.
Drafting Information
The principal authors of these regulations are R. Lisa Mojiri-Azad
and John T. Ricotta of the Office of the Division Counsel/Associate
Chief Counsel (Tax Exempt and Government Entities). However, other
personnel from the IRS and Treasury participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Paragraph 2. Section 1.414(v)-1 is added to read as follows:
Sec. 1.414(v)-1 Catch-up contributions.
(a) Catch-up contributions--(1) General rule. An applicable
employer plan shall not be treated as failing to meet any requirement
of the Internal Revenue Code solely because the plan permits a catch-up
eligible participant to make catch-up contributions in accordance with
section 414(v) and this section. With respect to an applicable employer
plan, catch-up contributions are elective deferrals made by a catch-up
eligible participant that exceed any of the applicable limits set forth
in paragraph (b) of this section and that are treated under the
applicable employer plan as catch-up contributions, but only to the
extent they do not exceed the catch-up contribution limit described in
paragraph (c) of this section (determined in accordance with the
special rules for employers that maintain multiple applicable employer
plans in paragraph (f) of this section, if applicable). The definitions
in paragraphs (a)(2) through (5) of this section apply for purposes of
this section.
(2) Applicable employer plan. The term applicable employer plan
means a section 401(k) plan, a SIMPLE IRA plan
[[Page 53560]]
as defined in section 408(p), a simplified employee pension plan as
defined in section 408(k) (SEP), a plan or contract that satisfies the
requirements of section 403(b), or a section 457 eligible governmental
plan.
(3) Elective deferral. The term elective deferral means an elective
deferral within the meaning of section 402(g)(3) or any contribution to
a section 457 eligible governmental plan.
(4) Catch-up eligible participant--(i) General rule. The term
catch-up eligible participant means an employee who--
(A) Is eligible to make elective deferrals during the plan year
under an applicable employer plan (without regard to section 414(v) or
this section); and
(B) Is age 50 or older.
(ii) Projection of age 50. For purposes of paragraph (a)(4)(i)(B)
of this section, a participant who is projected to attain age 50 before
the end of a calendar year is deemed to be age 50 as of January 1 of
such year.
(5) Other definitions. (i) The terms employer, employee, section
401(k) plan, and highly compensated employee have the meanings provided
in Sec. 1.410(b)-9.
(ii) The term section 457 eligible governmental plan means an
eligible deferred compensation plan described in section 457(b) that is
established and maintained by an eligible employer described in section
457(e)(1)(A).
(b) Elective deferrals that exceed an applicable limit--(1)
Applicable limits. An applicable limit for purposes of determining
catch-up contributions for a catch-up eligible participant is any of
the following:
(i) Statutory limit. A statutory limit is a limit on elective
deferrals or annual additions permitted to be made (without regard to
section 414(v) and this section) with respect to an employee for a year
provided in section 401(a)(30), 402(h), 403(b)(1)(E), 404(h), 408(k),
408(p), 415, or 457, as applicable.
(ii) Employer-provided limit. An employer-provided limit is any
limit on the elective deferrals an employee is permitted to make
(without regard to section 414(v) and this section) that is contained
in the terms of the plan, but which is not required under the Internal
Revenue Code. Thus, for example, a plan provision that limits highly
compensated employees to a deferral percentage of 10% of compensation
is an employer-provided limit that is an applicable limit with respect
to the highly compensated employees.
(iii) Actual deferral percentage (ADP) limit. In the case of a
section 401(k) plan that would fail the ADP test of section 401(k)(3)
if it did not correct under section 401(k)(8), the ADP limit is the
highest amount of elective deferrals that can be retained in the plan
by a highly compensated employee under the rules of section
401(k)(8)(C). In the case of a SEP with a salary reduction arrangement
(within the meaning of section 408(k)(6)) that would fail the
requirements of section 408(k)(6)(A)(iii) if it did not correct in
accordance with section 408(k)(6)(C), the ADP limit is the highest
amount of elective deferrals that can be made by a highly compensated
employee under the rules of section 408(k)(6).
(2) Contributions in excess of applicable limit--(i) Plan year
limits. Except as provided in paragraph (b)(2)(ii) of this section, the
amount of elective deferrals in excess of an applicable limit is
determined as of the end of the plan year by comparing the total
elective deferrals for the plan year with the applicable limit for the
plan year. In the case of a plan that provides for separate employer-
provided limits on elective deferrals for separate portions of plan
compensation within the plan year, the applicable limit for the plan
year is the sum of the dollar amounts of the limits for the separate
portions. This plan provision may occur, for example, when the plan
sets a deferral percentage limit for each payroll period. If the plan
limits elective deferrals for separate portions of the plan year, then,
solely for purposes of determining the amount that is in excess of an
employer-provided limit, the plan may provide, as an alternative rule,
that the applicable limit for the plan year is the product of the
employee's plan year compensation and the time-weighted average of the
deferral percentage limits. Thus, for example, if a plan that provides
for use of a time-weighted average limits deferrals to 8 percent of
compensation during the first half of the plan year and 10 percent of
compensation for the second half of the plan year, the applicable limit
is 9 percent of each employee's plan year compensation.
(ii) Other year limit. In the case of an applicable limit which is
applied on the basis of a year other than the plan year (e.g., the
calendar year limit on elective deferrals under section 401(a)(30)),
the determination of whether elective deferrals are in excess of the
applicable limit is made on the basis of such other year.
(c) Catch-up contribution limit--(1) General rule. Elective
deferrals with respect to a catch-up eligible participant in excess of
an applicable limit under paragraph (b) of this section are treated as
catch-up contributions under this section as of a date within a taxable
year only to the extent that such elective deferrals do not exceed the
catch-up contribution limit described in this paragraph (c), reduced by
elective deferrals previously treated as catch-up contributions for the
taxable year, determined in accordance with paragraph (c)(3) of this
section. The catch-up contribution limit for a taxable year is
generally the applicable dollar catch-up limit for such taxable year,
as set forth in paragraph (c)(2) of this section. However, an elective
deferral is not treated as a catch-up contribution to the extent that
the elective deferral, when added to all other elective deferrals for
the taxable year under any applicable employer plan of the employer,
exceeds the participant's compensation (determined in accordance with
section 415(c)(3)) for the taxable year.
(2) Applicable dollar catch-up limit--(i) In general. The
applicable dollar catch-up limit for an applicable employer plan, other
than an applicable employer plan described in section 401(k)(11) or a
SIMPLE IRA plan as defined in section 408(p), is determined under the
following table:
------------------------------------------------------------------------
Applicable
dollar
For taxable years beginning in catch-up
limit
------------------------------------------------------------------------
2002....................................................... $1,000
2003....................................................... 2,000
2004....................................................... 3,000
2005....................................................... 4,000
2006....................................................... 5,000
------------------------------------------------------------------------
(ii) SIMPLE plan. The applicable dollar catch-up limit for an
applicable employer plan described in section 401(k)(11) or a SIMPLE
IRA plan as defined in section 408(p) is determined under the following
table:
------------------------------------------------------------------------
Applicable
dollar
For taxable years beginning in catch-up
limit
------------------------------------------------------------------------
2002....................................................... $500
2003....................................................... 1,000
2004....................................................... 1,500
2005....................................................... 2,000
2006....................................................... 2,500
------------------------------------------------------------------------
(iii) Cost of living adjustments. For taxable years after 2006, the
applicable dollar catch-up limit is the applicable dollar catch-up
limit for 2006 described in paragraph (c)(2)(i) or (ii) of this section
increased at the same time and in the same manner as adjustments under
section 415(d), except that the base period shall be the calendar
quarter beginning July 1, 2005, and any increase that is not a multiple
of $500 shall be rounded to the next lower multiple of $500.
[[Page 53561]]
(3) Timing rules. For purposes of determining the maximum amount of
permitted catch-up contributions for a catch-up eligible participant
during a taxable year, the determination of whether an elective
deferral is a catch-up contribution is made as of the last day of the
plan year (or in the case of section 415, as of the last day of the
limitation year), except that, with respect to elective deferrals in
excess of an applicable limit that is tested on the basis of the
taxable year or calendar year (e.g., the section 401(a)(30) limit on
elective deferrals), the determination of whether such elective
deferrals are treated as catch-up contributions is made at the time
they are deferred.
(d) Treatment of catch-up contributions--(1) Contributions not
taken into account for certain limits. Catch-up contributions shall not
be taken into account in applying the limits of section 401(a)(30),
401(k)(11), 402(h), 402A(c)(2), 403(b), 404(h), 408(k), 408(p), 415, or
457 to other contributions or benefits under an applicable employer
plan or any other plan of the employer.
(2) Contributions not taken into account for certain
nondiscrimination tests--(i) Application of ADP test. Elective
deferrals that are treated as catch-up contributions with respect to a
section 401(k) plan because they exceed a statutory or employer-
provided limit described in paragraph (b)(1)(i) or (ii) of this
section, respectively, are subtracted from the catch-up eligible
participant's elective deferrals for the plan year for purposes of
determining the actual deferral ratio (ADR) (as defined in
Sec. 1.401(k)-1(g)) of a catch-up eligible participant. Similarly,
elective deferrals that are treated as catch-up contributions with
respect to a SEP because they exceed a statutory or employer-provided
limit described in paragraph (b)(1)(i) or (ii) of this section,
respectively, are subtracted from the catch-up eligible participant's
elective deferrals for the plan year for purposes of determining the
deferral percentage under section 408(k)(6)(D) of a catch-up eligible
participant.
(ii) Adjustment of elective deferrals for correction purposes. For
purposes of the correction of excess contributions in accordance with
section 401(k)(8)(C), elective deferrals under the plan treated as
catch-up contributions for the plan year are subtracted from the catch-
up eligible participant's elective deferrals under the plan for the
plan year.
(iii) Excess contributions treated as catch-up contributions. A
section 401(k) plan that satisfies the ADP test of section 401(k)(3)
through correction under section 401(k)(8) must retain any elective
deferrals that are treated as catch-up contributions pursuant to
paragraph (c) of this section because they exceed the ADP limit in
paragraph (b)(1)(iii) of this section. In addition, a section 401(k)
plan is not treated as failing to satisfy section 401(k)(8) merely
because elective deferrals described in the preceding sentence are not
distributed or recharacterized as employee contributions. Similarly, a
SEP is not treated as failing to satisfy section 408(k)(6)(A)(iii)
merely because catch-up contributions are not treated as excess
contributions with respect to a catch-up eligible participant under the
rules of section 408(k)(6)(C). Notwithstanding the fact that elective
deferrals described in this paragraph (d)(2)(iii) are not distributed,
such elective deferrals are still considered to be excess contributions
under section 401(k)(8), and accordingly, matching contributions with
respect to such elective deferrals may be forfeited under the rules of
section 411(a)(3)(G).
(iv) Application for top-heavy. Catch-up contributions with respect
to the current plan year are not taken into account for purposes of
section 416. Thus, if the only contributions made for a plan year for
key employees are catch-up contributions, the applicable percentage
under section 416(c)(2) is 0%, and no top-heavy minimum contribution
under section 416 is required for the year. However, catch-up
contributions for prior years are taken into account for purposes of
section 416. Thus, catch-up contributions for prior years are included
in the account balances that are used in determining whether the plan
is top-heavy under section 416(g).
(v) Application for section 410(b). Catch-up contributions with
respect to the current plan year are not taken into account for
purposes of section 410(b). Thus, catch-up contributions are not taken
into account in determining the average benefit percentage under
Sec. 1.410(b)-5 for the year if benefit percentages are determined
based on current year contributions. However, catch-up contributions
for prior years are taken into account for purposes of section 410(b).
Thus, catch-up contributions for prior years would be included in the
account balances that are used in determining the average benefit
percentage if allocations for prior years are taken into account.
(3) Availability of catch-up contributions. An applicable employer
plan does not violate Sec. 1.401(a)(4)-4 merely because the group of
employees for whom catch-up contributions are currently available
(i.e., the catch-up eligible participants) is not a group of employees
that would satisfy section 410(b) (without regard to Sec. 1.410(b)-5).
In addition, a catch-up eligible participant is not treated as having a
right to a different rate of allocation of matching contributions
merely because an otherwise nondiscriminatory schedule of matching
rates is applied to elective deferrals that include catch-up
contributions. The rules in this paragraph (d)(3) also apply for
purposes of satisfying the requirements of section 403(b)(12).
(e) Universal availability requirement--(1) General rule. An
applicable employer plan that offers catch-up contributions and that is
otherwise subject to section 401(a)(4) (including a plan that is
subject to section 401(a)(4) pursuant to section 403(b)(12)) will not
satisfy the requirements of section 401(a)(4) unless all catch-up
eligible participants who participate under any applicable employer
plan maintained by the employer are provided with the effective
opportunity to make the same dollar amount of catch-up contributions. A
plan does not fail to satisfy this effective opportunity requirement
merely because the plan allows participants to defer an amount equal to
a specified percentage of compensation for each payroll period and for
each payroll period permits each catch-up eligible participant to defer
a pro-rata share of the applicable dollar catch-up limit in addition to
that amount. A plan does not fail the universal availability
requirement of this paragraph (e) solely because an employer-provided
limit does not apply to all employees or different limits apply to
different groups of employees under paragraph (b)(2)(i) of this
section. However, a plan may not provide lower employer-provided limits
for catch-up eligible participants.
(2) Exception for section 457 eligible governmental plans. An
applicable employer plan does not fail to comply with the universal
availability requirement of this paragraph (e) merely because another
applicable employer plan that is a section 457 eligible governmental
plan does not provide for catch-up contributions to the extent set
forth in section 414(v)(6)(C).
(3) Exception for newly acquired plans. An applicable employer plan
does not fail to comply with the universal availability requirement of
this paragraph (e) merely because another applicable employer plan does
not provide for catch-up contributions, if--
(i) The other applicable employer plan becomes maintained by the
employer by reason of a merger,
[[Page 53562]]
acquisition or similar transaction described in Sec. 1.410(b)-2(f); and
(ii) The other applicable employer plan is amended to provide for
catch-up contributions as soon as practicable, but no later than by the
end of the period described in section 410(b)(6)(C).
(f) Special rules for an employer that sponsors multiple plans--(1)
General rule. If elective deferrals under more than one applicable
employer plan of an employer are aggregated for purposes of applying a
statutory limit under paragraph (b)(1)(i) of this section, then the
aggregate elective deferrals treated as catch-up contributions by
reason of exceeding that statutory limit under all such applicable
employer plans must not exceed the applicable dollar catch-up limit for
the taxable year. For example, since compliance with section 401(a)(30)
is determined based on elective deferrals under section 401(k) plans
and section 403(b) contracts sponsored by the employer, the total
amount of elective deferrals under all section 401(k) plans and section
403(b) contracts of the employer treated as catch-up contributions by
reason of exceeding the section 401(a)(30) limit for a calendar year
under the aggregated plans must not exceed the applicable dollar catch-
up limit for such taxable year.
(2) Highly compensated employee in more that one section 401(k)
plan. If a highly compensated employee is a participant in more than
one section 401(k) plan of an employer, in determining whether the
employee's elective deferrals exceed an employer-provided limit under
paragraph (b)(1)(ii) of this section, the employer-provided limit for
the plan year is the sum of the dollar amounts of the limits under the
separate plans for that employee and the employee's elective deferrals
under all section 401(k) plans of the employer are combined to
determine if the employer-provided limit is exceeded.
(3) Allocation rules. When the amount of elective deferrals in
excess of an applicable limit under paragraph (b)(1) of this section is
determined under the aggregation rules of paragraph (f)(1) or (f)(2) of
this section, the aggregate amount of the elective deferrals in excess
of that applicable limit made under all section 401(k) plans that are
aggregated for purposes of determining a highly compensated employee's
ADR are treated as elective deferrals in excess of an applicable limit
for purposes of applying the catch-up contribution limit under
paragraph (c)(1) of this section with respect to each of these section
401(k) plans. However, the catch-up contributions are subtracted from
elective deferrals for purposes of paragraph (d)(2)(ii) of this section
only under the applicable employer plan under which the catch-up
contributions are made. The applicable employer plan under which the
elective deferrals in excess of an applicable limit are made for
purposes of this paragraph (f)(3) may be determined in any manner that
is not inconsistent with the manner in which such amounts were actually
deferred under the plans.
(g) Application of section 402(g)--(1) Exclusion of catch-up
contributions. In determining the amount of elective deferrals that are
includable in gross income under section 402(g), except as provided in
paragraph (g)(2) of this section, catch-up contributions are not
treated as exceeding the applicable dollar amount of section 402(g)(1).
For purposes of this paragraph (g), a catch-up eligible participant who
makes elective deferrals under applicable employer plans of two or more
employers that exceed the applicable dollar amount under section
402(g)(1) may treat the elective deferrals in excess of that applicable
dollar amount as a catch-up contribution to the extent permitted in
paragraph (g)(2) of this section, even though the elective deferrals do
not exceed an applicable limit under either plan. Therefore, for a
catch-up eligible participant who makes elective deferrals under
applicable employer plans of two or more employers that exceed the
applicable dollar amount under section 402(g)(1), the elective
deferrals in excess of that applicable dollar amount are excludable
from gross income as catch-up contributions to the extent permitted in
paragraph (g)(2) of this section. Whether an elective deferral is
treated as a catch-up contribution by an applicable employer plan is
determined under paragraph (c) of this section and without regard to
whether the employee treats an elective deferral as a catch-up
contribution under this paragraph (g).
(2) Maximum excludable amount. If a catch-up eligible participant
participates in two or more applicable employer plans during a taxable
year, the total amount of elective deferrals under all plans that are
not includable in gross income under this paragraph (g) because they
are catch-up contributions shall not exceed the applicable dollar
catch-up limit under paragraph (c)(2)(i) of this section for the
taxable year.
(h) Coordination with other catch-up provisions--(1) Coordination
with section 457(b)(3). In the case of an applicable employer plan that
is a section 457 eligible governmental plan, the catch-up contributions
permitted under this section shall not apply to a catch-up eligible
participant for any taxable year for which the additional contributions
permitted under section 457(b)(3) applies to such participant. For
additional guidance, see regulations under section 457.
(2) Coordination with section 402(g)(7). [Reserved].
(i) Examples. The following examples illustrate the application of
this section. For purposes of these examples, the limit under section
401(a)(30) is $15,000 and the applicable dollar catch-up limit is
$5,000 and, except as specifically provided, the plan year is the
calendar year. In addition, it is assumed that the participant's
elective deferrals under all plans of the employer do not exceed the
participant's section 415(c)(3) compensation and that any correction
pursuant to section 401(k)(8) is made through distribution of excess
contributions. The examples are as follows:
Example 1. (i) Participant A is eligible to make elective
deferrals under a section 401(k) plan, Plan P. Plan P does not limit
elective deferrals except as necessary to comply with sections
401(a)(30) and 415. In 2006, Participant A is 55 years old. Plan P
also provides that a catch-up eligible participant is permitted to
defer amounts in excess of the section 401(a)(30) limit up to the
applicable dollar catch-up limit for the year. Participant A defers
$18,000 during 2006.
(ii) Participant A's elective deferrals in excess of the section
401(a)(30) limit ($3,000) do not exceed the applicable dollar catch-
up limit for 2006 ($5,000). Under paragraph (a)(1) of this section,
the $3,000 is a catch-up contribution and, pursuant to paragraph
(d)(2)(i) of this section, it is not taken into account in
determining Participant A's ADR for purposes of section 401(k)(3).
Example 2. (i) Participants B and C, who are highly compensated
employees earning $120,000, are eligible to make elective deferrals
under a section 401(k) plan, Plan Q. Plan Q limits elective
deferrals as necessary to comply with section 401(a)(30) and 415,
and also provides that no highly compensated employee may make an
elective deferral at a rate that exceeds 10% of compensation.
However, Plan Q also provides that a catch-up eligible participant
is permitted to defer amounts in excess of 10% during the plan year
up to the applicable dollar catch-up limit for the year. In 2006,
Participants B and C are both 55 years old and, pursuant to the
catch-up provision in Plan Q, both elect to defer 10% of
compensation plus a pro-rata portion of the $5,000 applicable dollar
catch-up limit for 2006. Participant B continues this election in
effect for the entire year, for a total elective contribution for
the year of $17,000. However, in July 2006, after deferring $8,500,
Participant C discontinues making elective deferrals.
(ii) Once Participant B's elective deferrals for the year exceed
the section 401(a)(30) limit ($15,000), subsequent elective
deferrals are treated as catch-up contributions as they
[[Page 53563]]
are deferred, provided that such elective deferrals do not exceed
the catch-up contribution limit for the taxable year. Since the
$2,000 in elective deferrals made after Participant B reaches the
section 402(g) limit for the calendar year does not exceed the
applicable dollar catch-up limit for 2006, the entire $2,000 is
treated as a catch-up contribution.
(iii) As of the last day of the plan year, Participant B has
exceeded the employer-provided limit of 10% (10% of $120,000 or
$12,000 for Participant B) by an additional $3,000. Since the
additional $3,000 in elective deferrals does not exceed the $5,000
applicable dollar catch-up limit for 2006, reduced by the $2,000 in
elective deferrals previously treated as catch-up contributions, the
entire $3,000 of elective deferrals is treated as a catch-up
contribution.
(iv) In determining Participant B's ADR, the $5,000 of catch-up
contributions are subtracted from Participant B's elective deferrals
for the plan year under paragraph (d)(2)(i) of this section.
Accordingly, Participant B's ADR is 10% ($12,000 / $120,000). In
addition, for purposes of applying the rules of section 401(k)(8),
Participant B is treated as having elective deferrals of $12,000.
(v) Participant C's elective deferrals for the year do not
exceed an applicable limit for the plan year. Accordingly,
Participant C's $8,500 of elective deferrals must be taken into
account in determining Participant C's ADR for purposes of section
401(k)(3).
Example 3. (i) The facts are the same as in Example 2, except
that Plan Q is amended to change the maximum permitted deferral
percentage for highly compensated employees to 7%, effective for
deferrals after April 1, 2006. Participant B, who has earned $
40,000 in the first 3 months of the year and has been deferring at a
rate of 10% of compensation plus a pro-rata portion of the $5,000
applicable dollar catch-up limit for 2006, reduces the 10% of pay
deferral rate to 7% for the remaining 9 months of the year (while
continuing to defer a pro-rata portion of the $5,000 applicable
dollar catch-up limit for 2006). During those 9 months, Participant
B earns $80,000. Thus, Participant B's total elective deferrals for
the year are $14,600 ($4,000 for the first 3 months of the year plus
$5,600 for the last 9 months of the year plus an additional $5,000
throughout the year).
(ii) The employer-provided limit for Participant B for the plan
year is $9,600 ($4,000 for the first 3 months of the year, plus
$5,600 for the last 9 months of the year). Accordingly, Participant
B's elective deferrals for the year that are in excess of the
employer-provided limit are $5,000 (the excess of $14,600 over
$9,600), which does not exceed the applicable dollar catch-up limit
of $5,000.
(iii) Alternatively, Plan Q may provide that the employer-
provided limit is determined as the time-weighted average of the
different deferral percentage limits over the course of the year. In
this case, the time-weighted average limit is 7.75% for all
participants, and the applicable limit for Participant B is 7.75% of
$120,000, or $9,300. Accordingly, Participant B's elective deferrals
for the year that are in excess of the employer-provided limit are
$5,300 (the excess of $14,600 over $9,300). Since the amount of
Participant B's elective deferrals in excess of the employer-
provided limit ($5,300) exceeds the applicable dollar catch-up limit
for the taxable year, only $5,000 of Participant B's elective
deferrals may be treated as catch-up contributions. In determining
Participant B's actual deferral ratio, the $5,000 of catch-up
contributions are subtracted from Participant B's elective deferrals
for the plan year under paragraph (d)(2)(i) of this section.
Accordingly, Participant B's actual deferral ratio is 8% ($9,600 /
$120,000). In addition, for purposes of applying the rules of
section 401(k)(8), Participant B is treated as having elective
deferrals of $9,600.
Example 4. (i) The facts are the same as in Example 1. In
addition to Participant A, Participant D is a highly compensated
employee who is eligible to make elective deferrals under Plan P.
During 2006, Participant D, who is 60 years old, elects to defer
$14,000.
(ii) The ADP test is run for Plan P (after excluding the $3,000
in catch-up contributions from Participant A's elective deferrals),
but Plan P needs to take corrective action in order to pass the ADP
test. After applying the rules of section 401(k)(8)(C) to allocate
the total excess contributions determined under section
401(k)(8)(B), the maximum deferrals which may be retained by any
highly compensated employee in Plan P is $12,500.
(iii) Pursuant to paragraph (b)(1)(iii) of this section, the ADP
limit under Plan P of $12,500 is an applicable limit. Accordingly,
$1,500 of Participant D's elective deferrals exceed the applicable
limit. Similarly, $2,500 of Participant A's elective deferrals
(other than the $3,000 of elective deferrals treated as catch-up
contributions because they exceed the section 401(a)(30) limit)
exceed the applicable limit.
(iv) The $1,500 of Participant D's elective deferrals that
exceed the applicable limit are less than the applicable dollar
catch-up limit and are treated as catch-up contributions. Pursuant
to paragraph (d)(2)(iii) of this section, Plan P must retain
Participant D's $1,500 in elective deferrals and Plan P is not
treated as failing to satisfy section 401(k)(8) merely because the
elective deferrals are not distributed to Participant D.
(v) The $2,500 of Participant A's elective deferrals that exceed
the applicable limit are greater than the portion of the applicable
dollar catch-up limit ($2,000) that remains after treating the
$3,000 of elective deferrals in excess of the section 401(a)(30)
limit as catch-up contributions. Accordingly, $2000 of Participant
A's elective deferrals are treated as catch-up contributions.
Pursuant to paragraph (d)(2)(iii) of this section, Plan P must
retain Participant A's $2,000 in elective deferrals and Plan P is
not treated as failing to satisfy section 401(k)(8) merely because
the elective deferrals are not distributed to Participant A.
However, $500 of Participant A's elective deferrals can not be
treated as catch-up contributions and must be distributed to
Participant A in order to satisfy section 401(k)(8).
Example 5. (i) Participant E is a catch-up eligible employee
under a section 401(k) plan, Plan R, with a plan year ending October
31, 2006. Plan R does not limit elective deferrals except as
necessary to comply with section 401(a)(30) and section 415. Plan R
permits all catch-up eligible participants to defer an additional
amount equal to the applicable dollar catch-up limit for the year
($5,000) in excess of the section 401(a)(30) limit. Participant E
did not exceed the section 401(a)(30) limit in 2005. Participant E
made $3,200 of deferrals in the period November 1, 2005 through
December 31, 2005 and an additional $16,000 of deferrals in the
first 10 months of 2006, for a total of $19,200 in elective
deferrals for the plan year.
(ii) Once Participant E's elective deferrals for the calendar
year 2006 exceed $15,000, subsequent elective deferrals are treated
as catch-up contributions at the time they are deferred, provided
that such elective deferrals do not exceed the applicable dollar
catch-up limit for the taxable year. Since the $1,000 in elective
deferrals made after Participant E reaches the section 402(g) limit
for the calendar year does not exceed the applicable dollar catch-up
limit for 2006, the entire $1,000 is a catch-up contribution.
Pursuant to paragraph (d)(2)(i) of this section, $1,000 is
subtracted from Participant E's $19,200 in elective deferrals for
the plan year ending October 31, 2006 in determining Participant E's
ADR for that plan year.
(iii) The ADP test is run for Plan R (after excluding the $1,000
in elective deferrals in excess of the section 401(a)(30) limit),
but Plan R needs to take corrective action in order to pass the ADP
test. After applying the rules of section 401(k)(8)(C) to allocate
the total excess contributions determined under section
401(k)(8)(C), the maximum deferrals that may be retained by any
highly compensated employee under Plan R for the plan year ending
October 31, 2006 (the ADP limit) is $14,800.
(iv) Under paragraph (d)(2)(ii) of this section, elective
deferrals that exceed the section 401(a)(30) limit under Plan R are
also subtracted from Participant E's elective deferrals under Plan R
for purposes of applying the rules of 401(k)(8). Accordingly, for
purposes of correcting the failed ADP test, Participant E is treated
as having contributed $18,200 of elective deferrals in Plan R. The
amount of elective deferrals that would have to be distributed to
Participant E in order to satisfy section 401(k)(8)(C) is $3,400
($18,200 minus $14,800), which is less than the excess of the
applicable dollar catch-up limit ($5,000) over the elective
deferrals previously treated as catch-up contributions under Plan R
for the taxable year ($1,000). Under paragraph (d)(2)(iii) of this
section, Plan R must retain Participant E's $3,400 in elective
deferrals and is not treated as failing to satisfy section 401(k)(8)
merely because the elective deferrals are not distributed to
Participant E.
(v) Even though Participant E's elective deferrals for the
calendar year 2006 have exceeded the section 401(a)(30) limit,
Participant E can continue to make elective deferrals during the
last two months of the calendar year, since Participant E's catch-up
contributions for the taxable year have not exceeded the applicable
dollar catch-up limit
[[Page 53564]]
for the taxable year. However, the maximum amount of elective
deferrals Participant E may make for the balance of the calendar
year is $600 (the $5,000 applicable dollar catch-up limit for 2006,
reduced by the $4,400 ($1,000 plus $3,400) of elective deferrals
previously treated as catch-up contributions during the taxable
year).
Example 6. (i) The facts are the same as in Example 5, except
that Participant E exceeded the section 401(a)(30) limit for 2005 by
$1,300 prior to October 31, 2005, and made $600 of elective
deferrals in the period November 1, 2005, through December 31, 2005
(which were catch-up contributions for 2005). Thus, Participant E
made $16,600 of elective deferrals for the plan year ending October
31, 2006.
(ii) Once Participant E's elective deferrals for the calendar
year 2006 exceed $15,000, subsequent elective deferrals are treated
as catch-up contributions as they are deferred, provided that such
elective deferrals do not exceed the applicable dollar catch-up
limit for the taxable year. Since the $1,000 in elective deferrals
made after Participant E reaches the section 402(g) limit for
calendar year 2006 does not exceed the applicable dollar catch-up
limit for 2006, the entire $1,000 is a catch-up contribution.
Pursuant to paragraph (d)(2)(i) of this section, $1,000 is
subtracted from Participant E's elective deferrals in determining
Participant E's actual deferral ratio for the plan year ending
October 31, 2006. In addition, the $600 of catch-up contributions
from the period November 1, 2005 to December 31, 2005 are subtracted
from Participant E's elective deferrals in determining Participant
E's ADR. Thus, the total elective deferrals taken into account in
determining Participant E's ADR for the plan year ending October 31,
2006, is $15,000 ($16,600 in elective deferrals for the current plan
year, less $1,600 in catch-up contributions).
(iii) The ADP test is run for Plan R (after excluding the $1,600
in elective deferrals in excess of the section 401(a)(30) limit),
but Plan R needs to take corrective action in order to pass the ADP
test. After applying the rules of section 401(k)(8)(C) to allocate
the total excess contributions determined under section
401(k)(8)(C), the maximum deferrals that may be retained by any
highly compensated employee under Plan R (the ADP limit) is $14,800.
(iv) Under paragraph (d)(2)(ii) of this section, elective
deferrals that exceed the section 401(a)(30) limit under Plan R are
also subtracted from Participant E's elective deferrals under Plan R
for purposes of applying the rules of 401(k)(8). Accordingly, for
purposes of correcting the failed ADP test, Participant E is treated
as having contributed $15,000 of elective deferrals in Plan R. The
amount of elective deferrals that would have to be distributed to
Participant E in order to satisfy section 401(k)(8)(C) is $200
($15,000 minus $14,800), which is less than the excess of the
applicable dollar catch-up limit ($5,000) over the elective
deferrals previously treated as catch-up contributions under Plan R
for the taxable year ($1,000). Under paragraph (d)(2)(iii) of this
section, Plan R must retain Participant E's $200 in elective
deferrals and is not treated as failing to satisfy section 401(k)(8)
merely because the elective deferrals are not distributed to
Participant E.
(v) Even though Participant E's elective deferrals for calendar
year 2006 have exceeded the section 401(a)(30) limit, Participant E
can continue to make elective deferrals during the last two months
of the calendar year, since Participant E's catch-up contributions
for the taxable year 2006 have not exceeded the applicable dollar
catch-up limit for the taxable year. However, the maximum amount of
elective deferrals Participant E may make for the balance of the
calendar year is $3,800 (the $5,000 applicable dollar catch-up limit
for 2006, reduced by $1,200 ($1,000 plus $200) in elective deferrals
previously treated as catch-up contributions during taxable year
2006).
Example 7. (i) Participant F, who is 58 years old, is a highly
compensated employee who earns $100,000. Participant F participates
in a section 401(k) plan, Plan S, for the first six months of the
year and then transfers to another section 401(k) plan, Plan T,
sponsored by the same employer, for the second six months of the
year. Plan S limits highly compensated employees' elective deferrals
to 6% of compensation for the period of participation, but permits
catch-up eligible participants to defer amounts in excess of 6%
during the plan year, up to the applicable dollar catch-up limit for
the year. Plan T limits highly compensated employee's elective
deferrals to 8% of compensation for the period of participation, but
permits catch-up eligible participants to defer amounts in excess of
8% during the plan year, up to the applicable dollar catch-up limit
for the year. Participant F, who earned $50,000 in the first six
months of the year, defers $5,000 under Plan S. Participant F also
deferred $5,000 under Plan T.
(ii) Under paragraph (f)(2) of this section, the employer-
provided limit for Participant F is $7,000, the sum of the employer-
provided limit for Plan S ($3,000) and the employer-provided limit
for Plan T ($4,000). Participant F's elective deferrals for the year
are $10,000. Therefore, the amount of Participant F's elective
deferrals in excess of the employer-provided limit is $3,000. Under
paragraph (f)(3) of this section, the $3,000 in excess of the
employer-provided limit is treated as an elective deferral in excess
of that limit under both Plans S and T for purposes of applying the
catch-up contribution limit under paragraph (c)(1) of this section.
(iii) Since the amount of Participant F's elective deferrals in
excess of the employer-provided limit ($3,000) does not exceed the
applicable dollar catch-up limit for the taxable year, the entire
$3,000 of Participant F's elective deferrals are treated as catch-up
contributions. In determining Participant F's actual deferral ratio,
the entire $3,000 of catch-up contributions is subtracted from
Participant F's elective deferrals for the plan year under paragraph
(d)(2)(i) of this section. Accordingly, Participant F's actual
deferral ratio is 7% ($7,000/$100,000) for both Plans S and T.
(iv) In accordance with paragraph (f)(3) of this section, it is
determined that $2,000 of the excess over the employer-provided
limit was made under Plan S and $1,000 of the excess over the
employer-provided limit was made under Plan T. This determination is
not inconsistent with the manner in which the elective deferrals
were actually made. Therefore, under paragraph (d)(2)(ii) of this
section, for purposes of applying the rules of section 401(k)(8),
Participant F is treated as having elective deferrals of $3,000
($5,000-$2,000) in Plan S and $4,000 ($5,000-$1,000) in Plan T.
(v) If, after applying the ADP test of section 401(k)(3), Plan S
or Plan T were to require correction under section 401(k)(8), the
maximum amount of elective deferrals in excess of the ADP limit that
could be treated as catch-up contributions for Participant F under
the Plan could not exceed $2,000, the applicable dollar catch-up
limit of $5,000, reduced by the $3,000 in excess of the employer-
provided limit previously treated as catch-up contributions for the
taxable year.
(j) Effective date and transition rule-- (1) Effective date.
Section 414(v) and this section apply to contributions in taxable
years beginning on or after January 1, 2002.
(2) Transition rule for collectively bargained employees. An
applicable employer plan will not fail to satisfy the requirements
of paragraph (e) of this section merely because employees eligible
to make elective deferrals who are included in a unit of employees
covered by a collective bargaining agreement in effect on January 1,
2002, are not permitted to make catch-up contributions until the
first plan year beginning after the termination of such agreement.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 01-26566 Filed 10-22-01; 8:45 am]
BILLING CODE 4830-01-P