Catch-up Contributions to 401K - over age 50
skippy
18 Posts
[font size="1" color="#FF0000"]LAST EDITED ON 01-11-02 AT 06:13AM (CST)[/font][p]Our 401K plan is with a well known national company. Our payroll is with ADP, another national company. My external auditor is yet another well known national company and they're all telling me something different. The 401K administrator says:
The maximum in a 401K is $11,000 in 2002. Over age 50 employees can add $1,000 to that for a total of $12,000. However, ANYONE over age 50 can contribute the $12,000. Here is the confusion:
In prior years, you could only reach the maximum ($11,000 this year) through the percentage you contributed. The amount of your salary determined if you could reach the max. For example: someone who made $20,000/yr putting 15% into a 401K plan would only be able to contribute $3,000 - no where near the maximum.
Under the new rules, this same person could now contribute the difference between the $3,000 and the $12,000 ($9,000)into the plan in 2002. My 401K plan administrator went so far as to say that someone earning $12,000 a year over age 50 could put their entire salary into the 401K plan in 2002.
ADP disagrees, although their "catch-up" codes did not block out this extra contribution. Our auditors say this is not true, however, they noted that the percentages are no longer in the regulation.
Does anyone have information on this? HELP.. Thank you.
The maximum in a 401K is $11,000 in 2002. Over age 50 employees can add $1,000 to that for a total of $12,000. However, ANYONE over age 50 can contribute the $12,000. Here is the confusion:
In prior years, you could only reach the maximum ($11,000 this year) through the percentage you contributed. The amount of your salary determined if you could reach the max. For example: someone who made $20,000/yr putting 15% into a 401K plan would only be able to contribute $3,000 - no where near the maximum.
Under the new rules, this same person could now contribute the difference between the $3,000 and the $12,000 ($9,000)into the plan in 2002. My 401K plan administrator went so far as to say that someone earning $12,000 a year over age 50 could put their entire salary into the 401K plan in 2002.
ADP disagrees, although their "catch-up" codes did not block out this extra contribution. Our auditors say this is not true, however, they noted that the percentages are no longer in the regulation.
Does anyone have information on this? HELP.. Thank you.
Comments
With EGTRRA, the percentage portion of the annual additions limit has been repealed. The dollar limitation has not been repealed with EGTRRA, however it's been increased to $40,000 per year.
A participant can now contribute up to 100% of their pay as an elective deferral. Participants still have to elect a percentage of pay to defer. If they are over age 50, they can then elect to defer an additional $1,000 once they've contributed the max. All contributions are still subject to the $40,000 annual additions limit, except the "catch-up" contribution.
Your plan document will have to be amended to allow the increased percentage-of-deferral limits and the catch-up contributions. If your plan currently limits deferral percentages, and a participant over age 50 could not reach the dollar limit ($11,000) because of his or her compensation level, then he/she could not make "catch up contributions". Both types of contributions, where "regular" elective deferrals or catch-up contributions, are still made on a percentage-of-pay basis. So, your plan must allow a partcipant to contribute a high enough percentage of pay to reach the limit and then play "catch-up."
It sounds like your auditor and ADP both have good info but neither one is giving you the whole picture. I am little worried about your 401(k) recordkeeper! They should be the experts who can give you a thorough understanding of the EGTRRA changes.
Hope this helps.