One of the most frequently
discussed EGTRRA provisions is the "catch-up
contribution" feature that 401(k) plans
may include for age 50 and older participants,
beginning in 2002. A 401(k) plan is not
required to include a catch-up contribution
feature; this feature is one of EGTRRA's
many optional enhancements to the
retirement plan rules.
The NRS GUST-approved prototype plans contain
the catch-up feature, giving the client
the choice of whether or not to adopt it.
Following are some of the highlights of
the new catch-up contribution provisions:
- Amounts - The maximum
catch-up contribution is $1,000 in 2002,
and increases by $1,000 each year until
it reaches $5,000 in 2006. After 2006,
it will increase with cost-of-living,
in $500 increments.
- Who is eligible to make catch-up
contributions? Under the proposed
regulations, an individual is eligible
to make catch-up contributions if he or
(i) is eligible to make elective
deferrals during the plan year, and
(ii) is age 50 or older. (An individual
who is projected to attain age 50
by the end of the calendar year is
deemed to be age 50 as of January
1st of that year.)
The plan must satisfy certain logical
rules so that all age 50 and over
participants have an "effective opportunity"
to make catch-up contributions (assuming
they are allowed to make elective
deferrals) and that the feature is
to those participants.
- Catch-up contributions are defined
essentially as elective deferrals that
exceed any otherwise applicable limit
under the tax code or the plan (i.e.,
the IRC 415, 402(g) and ADP limits).
- Impact on ADP test - Catch-up
contributions are generally disregarded
in the ADP test.
- Impact on Top-heavy - If a plan
is top-heavy, the catch-up contributions
made during the plan year are disregarded
for that year but catch-up contributions
from prior years are included in determining
if the plan is top-heavy.
Please do not hesitate to contact your
NRS Account Manager to discuss this 401(k)
plan optional enhancement.