As you probably know, if allowed by the plan document, participants who attain the age of 50 or older are eligible to make an additional $5,500 “catch-up” contribution. This is in effect a free contribution, as it is not counted on the ADP test.
Although there are actually four ways to make a catch-up contribution, traditionally the catch-up is made in one of two ways:
1. You defer the $17,500 maximum (for 2013) and then you defer an additional $5,500, orSo what happens if you are a Highly Compensated Employee (HCE), you are over the age of 50, and you are precluded from deferring the maximum $17,500 because the deferral percentage of the Non-Highly Compensated (NHCE) group will not support that deferral?
2. Your ADP test fails, and up to $5,500 of your refund is recharacterized as catch-up. This only works if you have not already deferred the catch-up.
You amend your plan limit for HCE’s.
Example:
Let’s say you are an HCE and your compensation is $200,000.
$17,500 divided by $200,000 is an ADP percentage of 8.75%
The deferral percentage for the NHCE’s is 5%.
This will only support a deferral for you of 7%.
Solution:
Amend your plan so that the maximum plan limit for HCE’s is 7%. Anything over that would be considered catch-up.
Would you be able to defer the maximum $17,500 plus the catch-up? No. Would you be able to defer an amount that would not cause your ADP test to fail, plus defer the catch-up? Yes!
Of course there are some considerations with this. This example is merely to show that you have options. We want your plan to work for you as well as for your participants. Let us help you make your really great benefit even better!
