Prop. Regs. issued on age 50 "catch-up" deferrals for Sec. 401(k), 403(b) and other plans.

AuthorKautter, David J.
PositionSalary reduction savings plans

The IRS issued proposed regulations on Oct. 23, 2001, explaining retirement plan "catch-up" contributions made by individuals age 50 and over as provided in Sec. 414(v) (added by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)). In general, the proposed regulations apply to catch-up contributions in tax years beginning in 2002.

Plans Eligible to Offer Catch-Up Contributions

The following types of employer-sponsored plans are the primary vehicles to which catch-up contributions may apply:

* Sec. 401(k) plans;

* Sec. 403(b) annuity plans;

* Sec. 457 eligible governmental plans;

* Savings incentive match plan for employees (SIMPLE) IRA plans; and

* Simplified employee pension (SEP) plans.

Age 50 Requirement

Only participants age 50 or over may make catch-up contributions. A participant projected to reach age 50 before the end of a calendar year is deemed to be age 50 as of January 1 of such year.

Determination of Catch-Up Contributions

Elective deferrals that exceed any "applicable limit" are treated as catch-up contributions to the extent they do not exceed the catch-up contribution dollar limit.

Applicable limits. Catch-up contributions are determined by reference to three types of plan limits:

  1. A statutory limit is a ceiling on elective deferrals or annual additions imposed under Sec. 401(a)(30), 415, 457 or 403(b)(1)(E), among other provisions.

  2. An employer-provided limit is a limit on elective deferrals provided under the plan terms but not required under the Code.

  3. The average deferral (ADP) limit is the highest dollar amount of elective deferrals that a highly compensated employee (HCE) may retain in the plan under Sec. 401(k)(8)(C).

Catch-up contribution limits. The annual catch-up contribution limits will be phased in over the next five years:

Year Catch-up limit 2002 $1,000 2003 $2,000 2004 $3,000 2005 $4,000 2006 $5,000 The annual limit for SIMPLE IRAs is $500 for 2002, $1,000 for 2003, $1,500 for 2004, $2,000 for 2005 and $2,500 for 2006. After 2006, the annual limit for catch-up contributions will be adjusted for inflation in $500 increments.

Timing. In general, 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. For an applicable limit determined on the basis of a year other than the plan year, the determination of whether elective...

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