IRS Issues Final Regulations on Catch-Up Contributions

The IRS has issued final regulations on catch-up contributions, which may be made to retirement plans by individuals age 50 and over.  Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), individuals age 50 and over are permitted to make additional elective deferrals (up to a dollar limit) under a retirement plan such as 401(k), 403(b) or governmental 457(b) plan that otherwise permits elective deferrals, provided certain requirements are satisfied.

Proposed regulations were issued in 2001 and for the most part, the new final regulations are quite similar although some changes were made in areas such as the "universal availability" requirement.  Here are the provisions of the recently issued final regulations on catch-up contributions that will apply to contributions made in taxable years beginning on or after January 1, 2004:

• Eligibility: An individual who is projected to attain age 50 during a calendar year is deemed to be age 50 as of January 1 of that year whether or not such person actually survives to age 50 and without regard to whether the employee terminates employment during the year.
  
  
• Determining Catch-up Contributions:  Catch-up contributions may be made once an applicable elective deferral limitation such as a:
  
  • statutory [for example, 402(g)],
  • employer provided [for example, highly compensated employees may only contribute 10%], and for 401(k) plans,
  • the average deferral percent (ADP) Test, is reached.
  
  Under the final regulations, the determination of catch-up contributions can only be made as of the end of the plan year.  Payroll-by-payroll determinations are not allowed.
  
  
• Multiple Plan Participation: For those employees participating in more than one elective deferral arrangement that is aggregated under a statutory rule, the final regulations require aggregation of catch-up contributions.
  
  Under Internal Revenue Code (IRC) Section 402(g), an individual's aggregate catch-up contributions to all 401(k) plans and 403(b) plans may not exceed $2,000 in 2003.  However, catch-up contributions from all 401(k) and 403(b) plans that an employee participates in are not aggregated with contributions to a governmental 457(b) plan.  Here's an example -- in 2003, an employee of a public university could make $2,000 catch-up contributions to both a 403(b) plan and an eligible 457(b) plan.  Aggregation is required for all eligible 457(b) plans in which an employee participates.
  
  
• Catch-ups & Matching Contributions: Under the final regulations, a plan sponsor that provides matching contributions for elective deferrals is not required to offer a matching contribution for catch-up contributions.
  
  
• Universal Availability: The proposed regulations required an employer to offer catch-up contributions on a uniform basis in all an employer's plans, which permit elective deferrals, if any of the plans permit catch-up deferrals.  However, under the final regulations, a plan does not have to include catch-up contribution election for employees who are members of a collective bargaining group.
  
  Please note that a 403(b) plan that does not provide for elective deferrals is not required to meet this universal availability rule.  A governmental employer who sponsors a 401(k) or 403(b) plan, which provides for a catch-up contribution is also not required to provide a catch-up election under an eligible 457(b) plan.
  
  
• ADP Testing Procedure & Re-Characterization of Excess Contributions as Catch-up Contributions: The final regulations provide that an amount that exceeds the ADP limit will be characterized as a catch-up contribution if the HCE is catch-up eligible participant.  To the extent the catch-up limit has already been reached for the calendar year, the excess will be refunded.
  
  When running the ADP for any year in which catch-up contributions may be made to the plan, the deferral percentage for any individual eligible for a catch-up is calculated without regard to elective deferrals that exceed any statutory or plan limit.  Following the ADP Test, the individuals' elective deferrals that exceed the ADP limit are re-characterized as catch-up contributions until the catch-up limit is reached.
  
  
• Coordination with other Catch-up Provisions:  Under the final regulations, an otherwise eligible individual may not make deferrals under the age 50 catch-up provision if a higher limitation is available under the special 3-year catch-up for an eligible governmental 457(b) plan.
  
  In addition, the final regulations provide that a participant who is otherwise eligible for both the age 50 catch-up as well as the 15-year rule for 403(b) plans under Section 402(g) may contribute under both provisions for a maximum contribution of $17,000 in 2003.

For more information, please visit the IRS's site at www.irs.gov.