Background in Brief

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) modified the Internal Revenue Code (IRC) to permit employees age 50 and older to make extra elective contributions ("50+ catch-up contributions") to §401(k), §403(b) and governmental §457 plans starting in tax years that began after December 31, 2001. The "applicable dollar catch-up limit" is determined under the following table:

Key Provisions in the Final Regulations

The final regulations make the following clarifications:

• Collectively bargained employees are disregarded for purposes of determining whether a plan complies with the "universal availability" requirement. The universal applicability requirement states that that a plan offering catch-up contributions satisfies the nondiscrimination requirements of IRC §401(a)(4) only if all catch-up eligible participants are provided an opportunity to make the same dollar amount of catch-up contributions. The IRS made this change to the proposed rules in response to suggestions from commentators who explained how difficult it would have been for collectively bargained plans with multiple, unrelated employers to satisfy this requirement. The text of the regulation expressly protects non-bargained plans that exclude employees working under collective bargaining agreements. Treasury Department officials have confirmed that the protections work the other way as well: collectively bargained plans will not be treated as discriminatory if they exclude non-bargained participants.
• The amount of catch-up contributions must be determined as of the end of a plan year, and cannot be determined on a payroll-by-payroll basis. The IRS decided that the need to prevent abuse associated with a payroll method of determining catch-up contributions outweighed the administrative simplification advantages of such a method. However, the final regulations provide two alternative rules that reduce the need for a payroll method of determining catch-up contributions:
1. Where a plan changes the employer-provided limit during the plan year (e.g., from 8 percent for the first six months and then 10 percent for the rest of the year), the final regulations permit the plan to use a time-weighted average of the employer-provided limits as of the end of the plan year (e.g., 9 percent for the entire plan year). An employer-provided limit is one that is contained in the plan document, other than a statutory or actual deferral percentage (ADP) limit. Elective deferrals in excess of an employer-provided limit are treated as catch-up contributions up to the amount of the dollar catch-up limit.
2. A plan is permitted to use the definition of compensation used for ADP testing to determine a time-weighted average of the employer-provided limit, regardless of whether the limit changed during the plan year. This means that the plan does not have to collect and retain data on compensation used for elective deferrals, in addition to compensation used for ADP testing, throughout the plan year.
• A plan will not fail to satisfy the universal availability requirement simply because it applies a cash availability limit on elective deferrals. A cash availability limit is one that restricts elective deferrals, including catch-up contributions, to amounts available after withholding from the employee's pay.
• A plan that satisfies the universal availability requirement prior to an acquisition or disposition continues to be treated as satisfying this requirement until the end of a transition period. Transition period is defined in IRC §410(b)(6)(C), and generally means the end of the plan year that begins after the effective date of the acquisition or disposition. This means that during this period, acquired employees are disregarded for purposes of determining whether the universal availability requirement is satisfied.
• For participants in multiple plans, all applicable plans of an employer, except governmental §457 plans, are treated as one plan for determining the applicable dollar catch-up limit for an employee. This rule was introduced by the Job Creation and Worker Assistance Act of 2002 (JCWAA). All governmental §457 plans of an employer are separately treated as one plan for this purpose. This Act also provided rules for coordinating age 50 catch-up contributions with the special catch-up contributions permitted by eligible §457 plans, whereby employees eligible to make both types of catch-up contributions can make only one type of catch-up contribution in a single plan year, whichever amount is greater, but not both. An example follows:

Example: In 2004, an employee is eligible to participate in a §401(k) plan, a §403(b) tax-sheltered annuity and a governmental §457 plan, all with the same employer.
Maximum elective deferrals to combination of §401(k) and §403(b)	$13,000
Maximum catch-up contributions to §401(k) and §403(b)	3,000
Maximum elective deferrals to governmental §457 plan	13,000
Maximum catch-up contributions to governmental §457 plan	3,000*
Total	32,000
* If the maximum dollar amount of special catch-up contributions permitted by the eligible §457 plan is greater than the $3,000 limit, the employee may make a contribution up to that amount.

Compliance Alert, The Segal Company’s periodic electronic newsletter summarizing important developments affecting benefit plan compliance, is for informational purposes only. It is not intended to provide authoritative guidance. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.

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