4830-01-p

DEPARTMENT OF TREASURY

Internal Revenue Service (IRS)

26 CFR Part 1

\[TD 9072\]

RIN 1545-BA24

Catch-Up Contributions for Individuals Age 50 or Older

AGENCY: Internal Revenue Service (IRS), Treasury

ACTION: Final regulations

SUMMARY: This document contains final regulations that provide guidance
concerning the requirements for retirement plans providing catch-up
contributions to individuals age 50 or older pursuant to the provisions
of section 414(v). These final regulations affect section 401(k) plans,
section 408(p) SIMPLE IRA plans, section 408(k) simplified employee
pensions, section 403(b) tax-sheltered annuity contracts, and section
457 eligible governmental plans, and affect participants eligible to
make elective deferrals under these plans or contracts.

DATES: [Effective Date:]{.underline} These final regulations are
effective on July 8, 2003.

[Applicability Date]{.underline}: These final regulations are applicable
to contributions in taxable years beginning on or after January 1, 2004.

FOR FURTHER INFORMATION CONTACT**:** R. Lisa Mojiri-Azad or John T.
Ricotta at 622-6060.

SUPPLEMENTARY INFORMATION**:**

**Background**

This document contains amendments to the Income Tax Regulations (26 CFR
Part 1) under sections 402(g) and 414(v) of the Internal Revenue Code
(Code). Section 414(v), added by the Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA) (Public Law 107-16; 115 Stat. 38),
effective for years beginning after December 31, 2001, permits an
individual age 50 or older to make additional elective deferrals each
year, up to a dollar limit, if certain requirements provided under that
section are satisfied. Under section 414(v)(3), these additional
elective deferrals are not subject to certain otherwise applicable
limitations on elective deferrals and are excluded from consideration
for certain nondiscrimination tests. Under section 414(v)(4), catch-up
contributions generally must be made available to all catch-up eligible
individuals who participate under any plan maintained by the employer
that provides for elective deferrals.

Section 402(g)(1)(C) was added by the Job Creation and Worker Assistance
Act of 2002, (JCWAA) (Public Law 107-147; 116 Stat. 21), effective for
years beginning after December 31, 2001. This section increases the
amount of elective deferrals that a catch-up eligible participant, as
defined in section 414(v), may exclude from gross income under section
402(g) by the same dollar limit applicable for the year under section
414(v).

JCWAA also included technical corrections to section 414(v), including
clarifications relating to: initial eligibility to make catch-up
contributions, coordination of section 414(v) catch-up contributions for
individuals who participate in more than one plan, coordination of
section 414(v) catch-up contributions with the catch-up contributions
provided under section 457(b)(3), and the application of the universal
availability requirement of section 414(v)(4) in connection with mergers
and acquisitions.

Proposed regulations under section 414(v) were published in the
**Federal Register** on October 23, 2001 (66 FR 53555). On February 21,
2002, a public hearing was held on the proposed regulations. Notice
2002-4 (2002-1 C.B. 298) provided transitional rules for complying with
the universal availability requirement of section 414(v)(4) and the
proposed regulations.

After consideration of the comments and the changes made by JCWAA, these
final regulations adopt the provisions of the proposed regulations with
certain modifications, the most significant of which are highlighted
below.

**Explanation of Provisions**

Under these final regulations, an applicable employer plan is not
treated as violating any provision of the Code merely because the plan
permits a catch-up eligible participant to make catch-up contributions.
For this purpose, an applicable employer plan is a section 401(k) plan,
a SIMPLE IRA plan (as defined in section 408(p)), a simplified employee
pension (as defined in section 408(k)) (SEP), a plan or contract that
satisfies the requirements of section 403(b), or a section 457 plan
maintained by an eligible governmental employer (a section 457 eligible
governmental plan).

Catch-up contributions are elective deferrals made by a catch-up
eligible participant that exceed an otherwise applicable limit and that
are treated as catch-up contributions under the plan, but only to the
extent they do not exceed the maximum amount of catch-up contributions
permitted for the taxable year. An employer is not required to provide
for catch-up contributions in any of its plans. However, if any plan of
an employer provides for catch-up contributions, all plans of the
employer that provide for elective deferrals must comply with the
universal availability requirement described below, to the extent
applicable.

A. [Eligibility for Catch-up Contributions]{.underline}

As under the proposed regulations, a participant is a catch-up eligible
participant, and thus is permitted to make catch-up contributions, if
the participant is otherwise eligible to make elective deferrals under
the plan and would attain age 50 or older before the end of the
participant's taxable year. In the case of a non-calendar year plan, a
participant is treated as a catch-up eligible participant beginning on
January 1 of the calendar year that includes the participant's 50^th^
birthday, without regard to the plan year.

B. [Determination of Catch-up Contributions]{.underline}

These final regulations retain the same basic structure for determining
catch-up contributions as provided in the proposed regulations. Elective
deferrals made by a catch-up eligible participant are treated as
catch-up contributions if they exceed any otherwise applicable limit, to
the extent they do not exceed the maximum dollar amount of catch-up
contributions permitted under section 414(v). Catch-up contributions are
determined by reference to three types of otherwise applicable limits:
statutory limits, employer-provided limits, and the actual deferral
percentage (ADP) limit.

A statutory limit is a limit contained in the Code on elective deferrals
or annual additions permitted to be made under the plan or contract
(without regard to section 414(v)). Statutory limits include the
requirement under section 401(a)(30) that a plan limit all elective
deferrals within a calendar year under the plan and other plans (or
contracts) maintained by members of a controlled group to the amount
permitted under section 402(g).

An employer-provided limit is a limit on the elective deferrals an
employee can make under the plan (without regard to section 414(v)) that
is contained in the terms of the plan, but is not a statutory limit or
the ADP limit. A number of commentators suggested that the regulations
specifically provide that a limitation on elective deferrals set by the
plan administrator in accordance with plan terms is a limit contained in
the terms of the plan. As noted in the preamble to the proposed
regulations, the condition that an employer-provided limit be contained
in the terms of the plan is intended to correspond with the requirements
of §1.401-1 that a qualified plan be a definite written program and
provide for a definite predetermined formula for allocating
contributions made to the plan. Accordingly, if a limit is otherwise
permissible under a section 401(k) plan, the limit will also satisfy the
requirement in section 414(v)(5) that the limit be contained in the
terms of the plan.

The ADP limit is the highest dollar amount of elective deferrals that
any highly compensated employee (HCE) is permitted under a section
401(k) plan for a plan year by reason of the ADP test under section
401(k)(3) (without regard to section 414(v)). The ADP limit is
determined after taking into account all elective deferrals (other than
elective deferrals that are catch-up contributions because of an
employer-provided limit or statutory limit) and qualified nonelective
contributions or qualified matching contributions for the plan year in
accordance with section 401(k)(3) and the applicable regulations, and
after any necessary correction under section 401(k)(8).

The final regulations retain the rule that the amount of elective
deferrals in excess of an applicable limit is generally determined as of
the end of a plan year by comparing the total elective deferrals for the
plan year with the applicable limit for the plan year. For an applicable
limit that is determined on the basis of a year other than a plan year
(such as the calendar year limit on elective deferrals under section
401(a)(30)), the determination of whether elective deferrals are in
excess of the applicable limit is made on the basis of such other year.

As under the proposed regulations, this annual method for determining
whether amounts are in excess of an applicable limit also applies to an
employer-provided limit that is applied on a payroll-by-payroll basis
during the plan year. A number of commentators suggested that plans that
provide for payroll-by-payroll limits, or similar limits that apply to a
portion of the plan year, be permitted to determine amounts in excess of
an applicable limit based on the period for which the limit is applied.
These commentators noted that, although a plan is permitted to determine
an additional amount of elective deferrals that a catch-up eligible
participant is permitted to make on a payroll-by-payroll basis, the plan
could not designate these elective deferrals as catch-up contributions
on the same basis. These commentators suggested that for such a plan, an
annual determination process would require the plan to collect and
retain additional data during the year. In many cases, plans use a
definition of compensation for purposes of ADP testing that is different
from the definition used during the year to determine elective
deferrals. Recordkeepers for these plans must collect and retain
payroll-by-payroll compensation, and then determine the
employer-provided limit on an annual basis before determining the amount
of elective deferrals that are catch-up contributions.

A number of advocates for a payroll-by-payroll determination of catch-up
contributions acknowledged that their proposal creates a risk that ADP
testing could be distorted through changes in plan limits during the
year. For example, if a plan were to provide that HCEs' elective
deferrals are limited, on a payroll-by-payroll basis, to 1% of
compensation for the first 2 months of the plan year, and then to 15% of
compensation for the remainder of the year, the result would be
equivalent to treating the first dollars deferred as catch-up
contributions. While few employers might be likely to adopt such a
design, a payroll-by-payroll system for determining catch-up
contributions would require restrictions on the extent to which changes
in employer-provided limits during the year could be made.

After considering these comments, Treasury and the IRS have determined
that the need for rules to prevent abuse associated with a
payroll-by-payroll method of determining catch-up contributions
outweighs the relative administrative advantages of that method, and
these regulations retain the annual method. However, to address
administrative concerns raised in these comments, these regulations also
expand the alternative methods for determining an employer-provided
limit in order to avoid requiring plans that use one definition of
compensation for elective deferrals and another definition for ADP
testing purposes to collect and retain data on both definitions.

These final regulations retain the rule in the proposed regulations that
a plan that changes an employer-provided limit during the plan year is
permitted to use a time-weighted average of these limits as the
employer-provided limit. For example, under this alternative method, a
plan that provides for an employer-provided limit of 8% for the first 6
months of the plan year and 10% for the second 6 months is permitted to
use 9% as the employer-provided limit for the plan year. These final
regulations also provide that the plan is permitted to use the
definition of compensation used for ADP testing purposes for this
weighted-average simplification, and can use this alternative method
without regard to whether the employer-provided limit is changed during
the plan year.

C. [Treatment of Catch-up Contributions]{.underline}

An elective deferral that is treated as a catch-up contribution is not
subject to otherwise applicable limits under the applicable employer
plan and the plan will not be treated as failing otherwise applicable
nondiscrimination requirements because of catch-up contributions. Under
these final regulations (including changes from the proposed regulations
to reflect the provisions of JCWAA), catch-up contributions are not
taken into account in applying the limits of section 401(a)(30), 402(h),
403(b), 408, 415(c), or 457(b)(2) (determined without regard to section
457(b)(3)) to other contributions or benefits under the plan offering
catch-up contributions or under any other plan of the employer.

Elective deferrals that are treated as catch-up contributions under a
plan because they exceed a statutory limit or an employer-provided limit
are disregarded for purposes of ADP testing. These catch-up
contributions are subtracted from the participant's elective deferrals
for the plan year prior to determining the participant's actual deferral
ratio. This subtraction applies without regard to whether the catch-up
eligible participant is an HCE or a nonhighly compensated employee
(NHCE). If a plan needs to take corrective action under section
401(k)(8), the plan must determine the amount of elective deferrals for
HCEs that are catch-up contributions because they are in excess of the
ADP limit and retain such amounts. The plan would not be treated as
failing section 401(k)(8) because these excess contributions are treated
as catch-up contributions and retained.

Amounts in excess of an applicable limit are treated as catch-up
contributions only to the extent that such excess amounts, combined with
amounts previously treated as catch-up contributions for the taxable
year, do not exceed the catch-up contribution limit for the year. As
discussed above, whether elective deferrals in excess of an applicable
limit can be treated as catch-up contributions is determined based on
the year (e.g., plan year, calendar year, or limitation year) with
respect to which each applicable limit is applied.

The interaction of this timing rule and the catch-up contribution limit
for the year is most significant for a plan with a plan year that is not
the calendar year. For example, in a plan with a plan year ending on
June 30, 2005, elective deferrals in excess of the employer-provided
limit or the ADP limit for the plan year ending June 30, 2005, would be
treated as catch-up contributions as of the last day of the plan year,
up to the catch-up contribution limit for 2005. These catch-up
contributions are not taken into account for purposes of compliance with
section 401(a)(30) for 2005. After June 30, 2005, the catch-up eligible
participant is permitted to continue to make elective deferrals up to
the section 401(a)(30) limit for 2005 (disregarding any amounts treated
as catch-up contributions for 2005, as of June 30, 2005) and these
additional contributions are not treated as contributions in excess of
the section 401(a)(30) limit. Accordingly, these additional
contributions are generally taken into account under the ADP test for
the plan year ending June 30, 2006. In addition, to the extent the
catch-up eligible participant has not made catch-up contributions up to
the catch-up contribution limit for 2005, the participant can make
additional catch-up contributions in excess of the section 401(a)(30)
limit for 2005. These latter contributions are catch-up contributions
which will not be taken into account under the ADP test for the plan
year ending June 30, 2006.

Without regard to their special treatment under certain
nondiscrimination provisions and limitations under the Code, catch-up
contributions are elective deferrals and remain subject to the
applicable requirements for elective deferrals. For example, catch-up
contributions under an applicable employer plan that is a section 401(k)
plan are subject to the distribution and vesting restrictions of section
401(k)(2)(B) and (C), although the plan provisions applicable to
distributions of elective deferrals treated as catch-up contributions
may differ from those applicable to other elective deferrals under the
plan (as long as each provision complies with the distribution
restrictions of section 401(k)(2)(B)).  In addition, excess
contributions treated as catch-up contributions nevertheless remain
excess contributions for purposes of section 411(a)(3)(G). Therefore,
the plan is permitted to provide that matching contributions related to
excess contributions treated as catch-up contributions are forfeited.
However, as discussed below, it is also permissible for a plan to
provide that these matching contributions are not forfeited, without
violating section 401(a)(4).

These final regulations retain the rules of the proposed regulations on
the treatment of catch-up contributions for purposes of sections 416,
410(b) and 401(a)(4). Catch-up contributions for the current plan year
are not taken into account under section 416 or 410(b). However,
catch-up contributions for prior years are taken into account in
determining whether a plan is top-heavy under section 416, and for
purposes of average benefit percentage testing to the extent prior
years' contributions are taken into account (i.e., if accrued-to-date
calculations are used). In addition, a plan does not fail the
requirements of section 401(a)(4) merely because it permits only
catch-up eligible participants to make catch-up contributions, without
regard to whether the group of catch-up eligible employees would satisfy
section 410(b). Similarly, if a plan applies a single matching formula
to elective deferrals whether or not they are catch-up contributions,
the matching formula as applied to catch-up eligible participants is not
treated as a separate benefit, right, or feature under §1.401(a)(4)-4
from the matching formula as applied to the other participants. However,
the matching contributions under the plan must satisfy the actual
contribution percentage test under section 401(m)(2) taking into account
all matching contributions, including matching contributions on catch-up
contributions.

A number of commentators indicated that some employers would not want to
provide matching contributions on catch-up contributions and requested
guidance on how they might accomplish that goal in light of the annual
determination of whether amounts are in excess of an employer-provided
limit. The IRS and Treasury believe that employers can achieve their
desired goal by specifying which contributions will be matched, rather
than specifying which contributions will not be matched. For example, if
an employer-provided limit on elective deferrals is 10% of compensation
for each payroll period, the plan can specify that matching
contributions will be made based on elective deferrals that do not
exceed 10% of compensation for that payroll period (and that do not
exceed a statutory limit), and that matching contributions on elective
deferrals in excess of the ADP limit will be forfeited, with the
assurance that the plan will not be matching catch-up contributions.

D. [Universal Availability]{.underline}

Section 414(v)(4)(A) provides that an applicable employer plan is
treated as failing to comply with section 401(a)(4) unless the plan
allows all catch-up eligible participants to make the same election with
respect to additional elective deferrals. Section 414(v)(4)(B) provides
that, for this purpose, all plans maintained by employers treated as a
single employer under section 414(b), (c), (m) or (o) are treated as a
single plan. The proposed regulations provided that, if an applicable
employer plan otherwise subject to section 401(a)(4) provides for
catch-up contributions, all other applicable employer plans in the
controlled group that provide for elective deferrals (including plans
not subject to section 401(a)(4)) must provide catch-up eligible
participants with the same effective opportunity to make catch-up
contributions. The proposed regulations also included a transition rule
for collectively bargained plans and an exception related to mergers and
acquisitions.

Several commentators requested that collectively bargained employees
described in section 410(b)(3) be disregarded for purposes of the
universal availability requirement, just as they are disregarded for
purposes of section 401(a)(4) compliance.  These commentators explained
that it is difficult to coordinate catch-up contributions among
non-collectively bargained employees and collectively bargained
employees, particularly when more than one collective bargaining unit is
involved. For employers participating in multiemployer plans, the
difficulties are increased significantly, because of the implications
for other, unrelated employers. Some commentators also requested that
other groups of employees be excluded pursuant to provisions of the
regulations under section 410(b) allowing employees to be excluded based
on plan design, such as participants who have not met the minimum age
and service requirements of section 410(a)(1) or employees in different
qualified separate lines of business under section 414(r).

In response to comments, these final regulations provide that employees
described in section 410(b)(3), most notably collectively bargained
employees, are disregarded for purposes of determining whether an
applicable employer plan complies with the universal availability
requirement. Pursuant to sections 401(a)(4) and 410(b)(3), collectively
bargained employees are disregarded for purposes of section 401(a)(4),
without regard to plan design or an employer's choice of testing method.
The final regulations do not adopt the other suggested exclusions,
participants who have not met minimum age and service or participants in
different qualified separate lines of business, because these exclusions
are based on plan design and testing choices.

These regulations otherwise retain the basic rules of the proposed
regulations relating to universal availability and provide that a plan
that offers catch-up contributions satisfies the requirements of section
401(a)(4) only if all catch-up eligible participants are provided with
an effective opportunity to make the same dollar amount of catch-up
contributions. Catch-up eligible participants do not have an effective
opportunity to make catch-up contributions unless the applicable
employer plan permits each catch-up eligible participant to make
sufficient elective deferrals during the year so that the participant
has the opportunity to make elective deferrals up to the otherwise
applicable limit plus the catch-up contribution limit. An effective
opportunity could be provided in several different ways. For example, a
plan that limits elective deferrals on a payroll-by-payroll basis might
also provide participants with an opportunity to make catch-up
contributions that is administered on a payroll-by-payroll basis (i.e.,
by allowing catch-up eligible participants to increase their deferrals
above the otherwise applicable limit by a pro-rata portion of the
catch-up limit for the year). The plan would satisfy the effective
opportunity requirement even though, as discussed above, whether these
elective deferrals are treated as catch-up contributions would not be
determined until the end of the year.

A plan will not fail the universal availability requirement solely
because an employer-provided limit does not apply to all employees or
different employer-provided limits apply to different groups of
employees, as long as each limit satisfies the nondiscriminatory
availability requirements of §1.401(a)(4)-4 for benefits, rights, and
features. Thus, for example, a plan could provide for an
employer-provided limit that applies to HCEs, even though no
employer-provided limit applies to NHCEs. However, as under the proposed
regulations, these final regulations retain the rule that an applicable
employer plan is not permitted to provide lower employer-provided limits
for catch-up eligible participants. Furthermore, a plan fails to provide
an effective opportunity to make catch-up contributions if it has an
applicable limit (e.g., an employer-provided limit) and does not permit
all catch-up eligible participants to make elective deferrals in excess
of that limit.

In addition to the exclusion for collectively bargained employees
discussed above, these final regulations include several other
exceptions to the universal availability requirement. Under these
regulations, a plan does not fail the universal availability requirement
because it restricts elective deferrals, including elective deferrals
for catch-up eligible participants, under a cash availability limit. A
cash availability limit is a limit that restricts elective deferrals to
amounts available after withholding from the employee's pay (e.g., after
deduction of all applicable income and employment taxes). For this
purpose, a limit of 75% of compensation or higher will be treated as
limiting employees to amounts available after other withholdings.

These final regulations also include a broader exception to the
universal availability requirement during the transition period provided
under section 410(b)(6)(C) than was included in the proposed
regulations, consistent with the amendments made by JCWAA. Under these
final regulations, an applicable employer plan that satisfies the
universal availability requirement before an acquisition or disposition
described in §1.410(b)-2(f) continues to be treated as satisfying the
universal availability requirement of section 414(v)(4) through the end
of the period described in section 410(b)(6)(C). These final regulations
also retain a rule providing for coordination between catch-up
contributions under section 414(v) and the provisions of section
457(b)(3), in accordance with section 414(v)(6)(C).

A number of comments were received on the application of the universal
availability requirement to an applicable employer plan that is
qualified under Puerto Rico tax law as well as under the Code. These
final regulations do not affect the transitional relief granted in
Notice 2002-4 that provides that an applicable employer plan will not
fail to satisfy the universal availability requirement solely because
another applicable employer plan of the employer that is qualified under
Puerto Rico law does not provide for catch-up contributions.

E. [Participants in Multiple Plans]{.underline}

The technical corrections in JCWAA amended section 414(v) to provide
that all applicable employer plans of an employer, other than section
457 eligible governmental plans, are treated as one plan for purposes of
determining the amount of catch-up contributions and all section 457
eligible governmental plans of the same employer are treated as one plan
for this purpose. Statutory limits, such as the limits under section
401(a)(30) or 415, already provide for coordination among plans in the
same controlled group, and elective deferrals in addition to the amounts
permitted under these limits are similarly coordinated.
Employer-provided limits, however, apply only to the plan that provides
for the limit, and the ADP limit applies only to section 401(k) plans.
Accordingly, these final regulations provide guidance on coordination of
the amount in excess of these limits on a controlled-group basis.

With respect to employer-provided limits, these regulations allow a plan
to permit a catch-up eligible participant to defer an amount in addition
to the amount allowed under the employer-provided limit, without regard
to whether the employee has already utilized his or her catch-up
opportunity under another plan of the same employer. However, to the
extent elective deferrals under another plan maintained by the employer
have already been treated as catch-up contributions during the taxable
year, the elective deferrals under the plan may be treated as catch-up
contributions only up to the amount remaining under the catch-up limit
for the year. Any other elective deferrals that exceed the
employer-provided limit may not be treated as catch-up contributions and
must satisfy the otherwise applicable nondiscrimination rules. For
example, the right to make contributions in excess of the
employer-provided limit is an other right or feature which must satisfy
§1.401(a)(4)-4 to the extent that the contributions are not catch-up
contributions. Also, contributions in excess of the employer provided
limit are taken into account under the ADP test to the extent they are
not catch-up contributions.

Finally, these regulations retain the allocation rule included in the
proposed regulations. When a participant is eligible under more than one
applicable employer plan maintained by the same employer, the specific
plan under which amounts in excess of an applicable limit are treated as
catch-up contributions is permitted to be determined in any manner that
is not inconsistent with the manner in which such amounts were actually
deferred under the plans.

F. [Excludability of Catch-up Contributions]{.underline}

JCWAA amended section 402(g) to increase the elective deferral limit for
a catch-up eligible participant by the amount of the allowable catch-up
contributions for the taxable year. The provisions of these final
regulations related to these provisions are under new §1.402(g)-2,
rather than under §1.414(v)-1, as in the proposed regulations. Under
§1.402(g)-2, the amount of elective deferrals that a catch-up eligible
participant is permitted to exclude from income under section 402(g) for
the taxable year is increased by the maximum amount of catch-up
contributions permitted for the taxable year under section 414(v). This
treatment by the catch-up eligible participant is not affected by
whether the applicable employer plans treat the elective deferrals as
catch-up contributions. Thus, a catch-up eligible participant who
participates in plans of two or more employers is permitted to exclude
from gross income elective deferrals that exceed the section 402(g)
limit, even though neither plan treats those elective deferrals as
catch-up contributions. In addition, the treatment by an individual of
such elective deferrals as catch-up contributions will not have any
effect on either employer's plan.

**Effective Date**

These final regulations are applicable to contributions in taxable years
beginning on or after January 1, 2004. Taxpayers are permitted to rely
on these final regulations and the proposed regulations for taxable
years beginning prior to January 1, 2004.

**Special Analyses**

It has been determined that these final regulations are not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. Because
§§1.402(g)-2 and 1.414(v)-1 impose no new collection of information on
small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of the Internal Revenue Code, the
notice of proposed rulemaking that preceded these final regulations was
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.

**Drafting Information**

The principal authors of these regulations are R. Lisa Mojiri-Azad and
John T. Ricotta of the Office of the Division Counsel/Associate Chief
Counsel (Tax Exempt and Government Entities). However, other personnel
from the IRS and Treasury participated in their development.

**List of Subjects in 26 CFR Part 1**

Income taxes, Reporting and recordkeeping requirements.

**Adoption of Amendments to the Regulations**

Accordingly, 26 CFR part 1 is amended as follows:

PART 1\--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part
as follows:

Authority: 26 U.S.C. 7805 \* \* \*

Par. 2. Section 1.402(g)-2 is added to read as follows:

[\'1.402(g)-2 Increased limit for catch-up contributions]{.underline}.

\(a\) [General rule]{.underline}. Under section 402(g)(1)(C), in
determining the amount of elective deferrals that are includible in
gross income under section 402(g) for a catch-up eligible participant
(within the meaning of §1.414(v)-1(g)), the otherwise applicable dollar
limit under section 402(g)(1)(B) (as increased under section 402(g)(7),
to the extent applicable) shall be further increased by the applicable
dollar catch-up limit as set forth under §1.414(v)-1(c)(2).

\(b\) [Participants in multiple plans]{.underline}. Paragraph (a) of
this section applies without regard to whether the applicable employer
plans (within the meaning of section 414(v)(6)) treat the elective
deferrals as catch-up contributions. Thus, a catch-up eligible
participant who makes elective deferrals under applicable employer plans
of two or more employers that in total exceed the applicable dollar
amount under section 402(g)(1) by an amount that does not exceed the
applicable dollar catch-up limit under either plan may exclude the
elective deferrals from gross income, even if neither applicable
employer plan treats those elective deferrals as catch-up contributions.

\(c\) [Effective date]{.underline}\--(1) [Statutory effective
date]{.underline}. Section 402(g)(1)(C) applies to contributions in
taxable years beginning on or after January 1, 2002.

\(2\) [Regulatory effective date]{.underline}. Paragraphs (a) and (b) of
this section apply to contributions in taxable years beginning on or
after January 1, 2004.

Par. 3. Section 1.414(v)-1 is added to read as follows:

[\'1.414(v)-1 Catch-up contributions]{.underline}.

\(a\) [Catch-up contributions]{.underline}\--(1) [General
rule]{.underline}. An applicable employer plan shall not be treated as
failing to meet any requirement of the Internal Revenue Code solely
because the plan permits a catch-up eligible participant to make
catch-up contributions in accordance with section 414(v) and this
section. With respect to an applicable employer plan, catch-up
contributions are elective deferrals made by a catch-up eligible
participant that exceed any of the applicable limits set forth in
paragraph (b) of this section and that are treated under the applicable
employer plan as catch-up contributions, but only to the extent they do
not exceed the catch-up contribution limit described in paragraph (c) of
this section (determined in accordance with the special rules for
employers that maintain multiple applicable employer plans in paragraph
(f) of this section, if applicable). To the extent provided under
paragraph (d) of this section, catch-up contributions are disregarded
for purposes of various statutory limits. In addition, unless otherwise
provided in paragraph (e) of this section, all catch-up eligible
participants of the employer must be provided the opportunity to make
catch-up contributions in order for an applicable employer plan to
comply with the universal availability requirement of section 414(v)(4).
The definitions in paragraph (g) of this section apply for purposes of
this section and §1.402(g)-2.

\(2\) [Treatment as elective deferrals]{.underline}. Except as
specifically provided in this section, elective deferrals treated as
catch-up contributions remain subject to statutory and regulatory rules
otherwise applicable to elective deferrals. For example, catch-up
contributions under an applicable employer plan that is a section 401(k)
plan are subject to the distribution and vesting restrictions of section
401(k)(2)(B) and (C). In addition, the plan is permitted to provide a
single election for catch-up eligible participants, with the
determination of whether elective deferrals are catch-up contributions
being made under the terms of the plan.

\(3\) [Coordination with section 457(b)(3)]{.underline}. In the case of
an applicable employer plan that is a section 457 eligible governmental
plan, the catch-up contributions permitted under this section shall not
apply to a catch-up eligible participant for any taxable year for which
a higher limitation applies to such participant under section 457(b)(3).
For additional guidance, see regulations under section 457.

\(b\) [Elective deferrals that exceed an applicable
limit]{.underline}\--(1) [Applicable limits]{.underline}. An applicable
limit for purposes of determining catch-up contributions for a catch-up
eligible participant is any of the following:

\(i\) [Statutory limit]{.underline}. A statutory limit is a limit on
elective deferrals or annual additions permitted to be made (without
regard to section 414(v) and this section) with respect to an employee
for a year provided in section 401(a)(30), 402(h), 403(b), 408, 415(c),
or 457(b)(2) (without regard to section 457(b)(3)), as applicable.

\(ii\) [Employer-provided limit]{.underline}. An employer-provided limit
is any limit on the elective deferrals an employee is permitted to make
(without regard to section 414(v) and this section) that is contained in
the terms of the plan, but which is not required under the Internal
Revenue Code. Thus, for example, if, in accordance with the terms of the
plan, highly compensated employees are limited to a deferral percentage
of 10% of compensation, this limit is an employer-provided limit that is
an applicable limit with respect to the highly compensated employees.

\(iii\) [Actual deferral percentage (ADP) limit]{.underline}. In the
case of a section 401(k) plan that would fail the ADP test of section
401(k)(3) if it did not correct under section 401(k)(8), the ADP limit
is the highest amount of elective deferrals that can be retained in the
plan by any highly compensated employee under the rules of section
401(k)(8)(C) (without regard to paragraph (d)(2)(iii) of this section).
In the case of a simplified employee pension (SEP) with a salary
reduction arrangement (within the meaning of section 408(k)(6)) that
would fail the requirements of section 408(k)(6)(A)(iii) if it did not
correct in accordance with section 408(k)(6)(C), the ADP limit is the
highest amount of elective deferrals that can be made by any highly
compensated employee under the rules of section 408(k)(6) (without
regard to paragraph (d)(2)(iii) of this section).

\(2\) [Contributions in excess of applicable limit]{.underline}\--(i)
[Plan year limits]{.underline}\--(A) [General rule]{.underline}. Except
as provided in paragraph (b)(2)(ii) of this section, 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. In addition,
except as provided in paragraph (b)(2)(i)(B) of this section, in the
case of a plan that provides for separate employer-provided limits on
elective deferrals for separate portions of plan compensation within the
plan year, the applicable limit for the plan year is the sum of the
dollar amounts of the limits for the separate portions. For example, if
a plan sets a deferral percentage limit for each payroll period, the
applicable limit for the plan year is the sum of the dollar amounts of
the limits for the payroll periods.

\(B\) [Alternative method for determining employer-provided
limit]{.underline}\--([1]{.underline}) [General rule]{.underline}. If
the plan limits elective deferrals for separate portions of the plan
year, then, solely for purposes of determining the amount that is in
excess of an employer-provided limit, the plan is permitted to provide
that the applicable limit for the plan year is the product of the
employee's plan year compensation and the time-weighted average of the
deferral percentage limits, rather than determining the
employer-provided limit as the sum of the limits for the separate
portions of the year. Thus, for example, if, in accordance with the
terms of the plan, highly compensated employees are limited to 8% of
compensation during the first half of the plan year and 10% of
compensation for the second half of the plan year, the plan is permitted
to provide that the applicable limit for a highly compensated employee
is 9% of the employee's plan year compensation.

([2]{.underline}) [Alternative definition of compensation
permitted]{.underline}. A plan using the alternative method in this
paragraph (b)(2)(i)(B) is permitted to provide that the applicable limit
for the plan year is determined as the product of the catch-up eligible
participant's compensation used for purposes of the ADP test and the
time-weighted average of the deferral percentage limits. The alternative
calculation in this paragraph (b)(2)(i)(B)([2]{.underline}) is available
regardless of whether the deferral percentage limits change during the
plan year.

\(ii\) [Other year limit]{.underline}. In the case of an applicable
limit that is applied on the basis of a year other than the plan year
(e.g., the calendar-year limit on elective deferrals under section
401(a)(30)), the determination of whether elective deferrals are in
excess of the applicable limit is made on the basis of such other year.

\(c\) [Catch-up contribution limit]{.underline}\--(1) [General
rule]{.underline}. Elective deferrals with respect to a catch-up
eligible participant in excess of an applicable limit under paragraph
(b) of this section are treated as catch-up contributions under this
section as of a date within a taxable year only to the extent that such
elective deferrals do not exceed the catch-up contribution limit
described in paragraphs (c)(1) and (2) of this section, reduced by
elective deferrals previously treated as catch-up contributions for the
taxable year, determined in accordance with paragraph (c)(3) of this
section. The catch-up contribution limit for a taxable year is generally
the applicable dollar catch-up limit for such taxable year, as set forth
in paragraph (c)(2) of this section. However, an elective deferral is
not treated as a catch-up contribution to the extent that the elective
deferral, when added to all other elective deferrals for the taxable
year under any applicable employer plan of the employer, exceeds the
participant's compensation (determined in accordance with section
415(c)(3)) for the taxable year. See also paragraph (f) of this section
for special rules for employees who participate in more than one
applicable employer plan maintained by the employer.

\(2\) [Applicable dollar catch-up limit]{.underline}\--(i) [In
general]{.underline}. The applicable dollar catch-up limit for an
applicable employer plan, other than a plan described in section
401(k)(11) or 408(p), is determined under the following table:

  ------------------------------------- ---------------------------------
  For Taxable Years Beginning in        Applicable Dollar Catch-up Limit

  2002                                  \$1,000

  2003                                  \$2,000

  2004                                  \$3,000

  2005                                  \$4,000

  2006                                  \$5,000
  ------------------------------------- ---------------------------------

\(ii\) [SIMPLE plans]{.underline}. The applicable dollar catch-up limit
for a SIMPLE 401(k) plan described in section 401(k)(11) or a SIMPLE IRA
plan as described in section 408(p) is determined under the following
table:

  ------------------------------------- ---------------------------------
  For Taxable Years Beginning in        Applicable Dollar Catch-up Limit

  2002                                  \$ 500

  2003                                  \$1,000

  2004                                  \$1,500

  2005                                  \$2,000

  2006                                  \$2,500
  ------------------------------------- ---------------------------------

\(iii\) [Cost of living adjustments]{.underline}. For taxable years
beginning after 2006, the applicable dollar catch-up limit is the
applicable dollar catch-up limit for 2006 described in paragraph
(c)(2)(i) or (ii) of this section increased at the same time and in the
same manner as adjustments under section 415(d), except that the base
period shall be the calendar quarter beginning July 1, 2005, and any
increase that is not a multiple of \$500 shall be rounded to the next
lower multiple of \$500.

\(3\) [Timing rules]{.underline}. For purposes of determining the
maximum amount of permitted catch-up contributions for a catch-up
eligible participant, the determination of whether an elective deferral
is a catch-up contribution is made as of the last day of the plan year
(or in the case of section 415, as of the last day of the limitation
year), except that, with respect to elective deferrals in excess of an
applicable limit that is tested on the basis of the taxable year or
calendar year (e.g., the section 401(a)(30) limit on elective
deferrals), the determination of whether such elective deferrals are
treated as catch-up contributions is made at the time they are deferred.

\(d\) [Treatment of catch-up contributions]{.underline}\--(1)
[Contributions not taken into account for certain limits]{.underline}.
Catch-up contributions are not taken into account in applying the limits
of section 401(a)(30), 402(h), 403(b), 408, 415(c), or 457(b)(2)
(determined without regard to section 457(b)(3)) to other contributions
or benefits under an applicable employer plan or any other plan of the
employer.

\(2\) [Contributions not taken into account in application of ADP
test]{.underline}\--(i) [Calculation of ADR]{.underline}. Elective
deferrals that are treated as catch-up contributions pursuant to
paragraph (c) of this section with respect to a section 401(k) plan
because they exceed a statutory or employer-provided limit described in
paragraph (b)(1)(i) or (ii) of this section, respectively, are
subtracted from the catch-up eligible participant's elective deferrals
for the plan year for purposes of determining the actual deferral ratio
(ADR) (as defined in regulations under section 401(k)) of a catch-up
eligible participant. Similarly, elective deferrals that are treated as
catch-up contributions pursuant to paragraph (c) of this section with
respect to a SEP because they exceed a statutory or employer-provided
limit described in paragraph (b)(1)(i) or (ii) of this section,
respectively, are subtracted from the catch-up eligible participant's
elective deferrals for the plan year for purposes of determining the
deferral percentage under section 408(k)(6)(D) of a catch-up eligible
participant.

\(ii\) [Adjustment of elective deferrals for correction
purposes.]{.underline} For purposes of the correction of excess
contributions in accordance with section 401(k)(8)(C), elective
deferrals under the plan treated as catch-up contributions for the plan
year and not taken into account in the ADP test under paragraph
(d)(2)(i) of this section are subtracted from the catch-up eligible
participant's elective deferrals under the plan for the plan year.

\(iii\) [Excess contributions treated as catch-up
contributions]{.underline}. A section 401(k) plan that satisfies the ADP
test of section 401(k)(3) through correction under section 401(k)(8)
must retain any elective deferrals that are treated as catch-up
contributions pursuant to paragraph (c) of this section because they
exceed the ADP limit in paragraph (b)(1)(iii) of this section. In
addition, a section 401(k) plan is not treated as failing to satisfy
section 401(k)(8) merely because elective deferrals described in the
preceding sentence are not distributed or recharacterized as employee
contributions. Similarly, a SEP is not treated as failing to satisfy
section 408(k)(6)(A)(iii) merely because catch-up contributions are not
treated as excess contributions with respect to a catch-up eligible
participant under the rules of section 408(k)(6)(C). Notwithstanding the
fact that elective deferrals described in this paragraph (d)(2)(iii) are
not distributed, such elective deferrals are still considered to be
excess contributions under section 401(k)(8), and accordingly, matching
contributions with respect to such elective deferrals are permitted to
be forfeited under the rules of section 411(a)(3)(G).

\(3\) [Contributions not taken into account for other nondiscrimination
purposes]{.underline}\--(i) [Application for top-heavy]{.underline}.
Catch-up contributions with respect to the current plan year are not
taken into account for purposes of section 416. However, catch-up
contributions for prior years are taken into account for purposes of
section 416. Thus, catch-up contributions for prior years are included
in the account balances that are used in determining whether the plan is
top-heavy under section 416(g).

\(ii\) [Application for section 410(b)]{.underline}. Catch-up
contributions with respect to the current plan year are not taken into
account for purposes of section 410(b). Thus, catch-up contributions are
not taken into account in determining the average benefit percentage
under \'1.410(b)-5 for the year if benefit percentages are determined
based on current year contributions. However, catch-up contributions for
prior years are taken into account for purposes of section 410(b). Thus,
catch-up contributions for prior years would be included in the account
balances that are used in determining the average benefit percentage if
allocations for prior years are taken into account.

\(4\) [Availability of catch-up contributions]{.underline}. An
applicable employer plan does not violate \'1.401(a)(4)-4 merely because
the group of employees for whom catch-up contributions are currently
available (i.e., the catch-up eligible participants) is not a group of
employees that would satisfy section 410(b) (without regard to
\'1.410(b)-5). In addition, a catch-up eligible participant is not
treated as having a right to a different rate of allocation of matching
contributions merely because an otherwise nondiscriminatory schedule of
matching rates is applied to elective deferrals that include catch-up
contributions. The rules in this paragraph (d)(4) also apply for
purposes of satisfying the requirements of section 403(b)(12).

\(e\) [Universal availability requirement]{.underline}\--(1) [General
rule]{.underline}\--(i) [Effective opportunity]{.underline}. An
applicable employer plan that offers catch-up contributions and that is
otherwise subject to section 401(a)(4) (including a plan that is subject
to section 401(a)(4) pursuant to section 403(b)(12)) will not satisfy
the requirements of section 401(a)(4) unless all catch-up eligible
participants who participate under any applicable employer plan
maintained by the employer are provided with an effective opportunity to
make the same dollar amount of catch-up contributions. A plan fails to
provide an effective opportunity to make catch-up contributions if it
has an applicable limit (e.g., an employer-provided limit) that applies
to a catch-up eligible participant and does not permit the participant
to make elective deferrals in excess of that limit. An applicable
employer plan does not fail to satisfy the universal availability
requirement of this paragraph (e) solely because an employer-provided
limit does not apply to all employees or different limits apply to
different groups of employees under paragraph (b)(2)(i) of this section.
However, a plan may not provide lower employer-provided limits for
catch-up eligible participants.

\(ii\) [Certain practices permitted]{.underline}\--(A) [Proration of
limit]{.underline}. A applicable employer plan does not fail to satisfy
the universal availability requirement of this paragraph (e) merely
because the plan allows participants to defer an amount equal to a
specified percentage of compensation for each payroll period and for
each payroll period permits each catch-up eligible participant to defer
a pro-rata share of the applicable dollar catch-up limit in addition to
that amount.

\(B\) [Cash availability]{.underline}. An applicable employer plan does
not fail to satisfy the universal availability requirement of this
paragraph (e) merely because it restricts the elective deferrals of any
employee (including a catch-up eligible participant) to amounts
available after other withholding from the employee's pay (e.g., after
deduction of all applicable income and employment taxes). For this
purpose, an employer limit of 75% of compensation or higher will be
treated as limiting employees to amounts available after other
withholdings.

\(2\) [Certain employees disregarded]{.underline}. An applicable
employer plan does not fail to satisfy the universal availability
requirement of this paragraph (e) merely because employees described in
section 410(b)(3) (e.g., collectively bargained employees) are not
provided the opportunity to make catch-up contributions.

\(3\) [Exception for certain plans]{.underline}. An applicable employer
plan does not fail to satisfy the universal availability requirement of
this paragraph (e) merely because another applicable employer plan that
is a section 457 eligible governmental plan does not provide for
catch-up contributions to the extent set forth in section 414(v)(6)(C)
and paragraph (a)(3) of this section.

\(4\) [Exception for section 410(b)(6)(C)(ii) period]{.underline}. If an
applicable employer plan satisfies the universal availability
requirement of this paragraph (e) before an acquisition or disposition
described in §1.410(b)-2(f) and would fail to satisfy the universal
availability requirement of this paragraph (e) merely because of such
event, then the applicable employer plan shall continue to be treated as
satisfying this paragraph (e) through the end of the period determined
under section 410(b)(6)(C)(ii).

\(f\) [Special rules for an employer that sponsors multiple
plans]{.underline}\--(1) [General rule]{.underline}. For purposes of
paragraph (c) of this section, all applicable employer plans, other than
section 457 eligible governmental plans, maintained by the same employer
are treated as one plan and all section 457 eligible governmental plans
maintained by the same employer are treated as one plan. Thus, the total
amount of catch-up contributions under all applicable employer plans of
an employer (other than section 457 eligible governmental plans) is
limited to the applicable dollar catch-up limit for the taxable year,
and the total amount of catch-up contributions for all section 457
eligible governmental plans of an employer is limited to the applicable
dollar catch-up limit for the taxable year.

\(2\) [Coordination of employer-provided limits]{.underline}. An
applicable employer plan is permitted to allow a catch-up eligible
participant to defer amounts in excess of an employer-provided limit
under that plan without regard to whether elective deferrals made by the
participant have been treated as catch-up contributions for the taxable
year under another applicable employer plan aggregated with such plan
under this paragraph (f). However, to the extent elective deferrals
under another plan maintained by the employer have already been treated
as catch-up contributions during the taxable year, the elective
deferrals under the plan may be treated as catch-up contributions only
up to the amount remaining under the catch-up limit for the year. Any
other elective deferrals that exceed the employer-provided limit may not
be treated as catch-up contributions and must satisfy the otherwise
applicable nondiscrimination rules. For example, the right to make
contributions in excess of the employer-provided limit is an other right
or feature which must satisfy §1.401(a)(4)-4 to the extent that the
contributions are not catch-up contributions. Also, contributions in
excess of the employer provided limit are taken into account under the
ADP test to the extent they are not catch-up contributions.

\(3\) [Allocation rules]{.underline}. If a catch-up eligible participant
makes additional elective deferrals in excess of an applicable limit
under paragraph (b)(1) of this section under more than one applicable
employer plan that is aggregated under the rules of this paragraph (f),
the applicable employer plan under which elective deferrals in excess of
an applicable limit are treated as catch-up contributions is permitted
to be determined in any manner that is not inconsistent with the manner
in which such amounts were actually deferred under the plan.

\(g\) [Definitions]{.underline}\--(1) [Applicable employer
plan]{.underline}. The term applicable employer plan means a section
401(k) plan, a SIMPLE IRA plan as defined in section 408(p), a
simplified employee pension plan as defined in section 408(k) (SEP), a
plan or contract that satisfies the requirements of section 403(b), or a
section 457 eligible governmental plan.

\(2\) [Elective deferral]{.underline}. The term elective deferral means
an elective deferral within the meaning of section 402(g)(3) or any
contribution to a section 457 eligible governmental plan.

\(3\) [Catch-up eligible participant]{.underline}. An employee is a
catch-up eligible participant for a taxable year if\--

\(i\) The employee is eligible to make elective deferrals under an
applicable employer plan (without regard to section 414(v) or this
section); and

\(ii\) The employee's 50th or higher birthday would occur before the end
of the employee's taxable year.

\(4\) [Other definitions]{.underline}. (i) The terms employer, employee,
section 401(k) plan, and highly compensated employee have the meanings
provided in \'1.410(b)-9.

\(ii\) The term section 457 eligible governmental plan means an eligible
deferred compensation plan described in section 457(b) that is
established and maintained by an eligible employer described in section
457(e)(1)(A).

\(h\) [Examples]{.underline}. The following examples illustrate the
application of this section. For purposes of these examples, the limit
under section 401(a)(30) is \$15,000 and the applicable dollar catch-up
limit is \$5,000 and, except as specifically provided, the plan year is
the calendar year. In addition, it is assumed that the participant's
elective deferrals under all plans of the employer do not exceed the
participant's section 415(c)(3) compensation, that the taxable year of
the participant is the calendar year and that any correction pursuant to
section 401(k)(8) is made through distribution of excess contributions.
The examples are as follows:

[Example 1]{.underline}. (i) Participant A is eligible to make elective
deferrals under a section 401(k) plan, Plan P. Plan P does not limit
elective deferrals except as necessary to comply with sections
401(a)(30) and 415. In 2006, Participant A is 55 years old. Plan P also
provides that a catch-up eligible participant is permitted to defer
amounts in excess of the section 401(a)(30) limit up to the applicable
dollar catch-up limit for the year. Participant A defers \$18,000 during
2006.

\(ii\) Participant A's elective deferrals in excess of the section
401(a)(30) limit (\$3,000) do not exceed the applicable dollar catch-up
limit for 2006 (\$5,000). Under paragraph (a)(1) of this section, the
\$3,000 is a catch-up contribution and, pursuant to paragraph (d)(2)(i)
of this section, it is not taken into account in determining Participant
A's ADR for purposes of section 401(k)(3).

[Example 2]{.underline}. (i) Participants B and C, who are highly
compensated employees each earning \$120,000, are eligible to make
elective deferrals under a section 401(k) plan, Plan Q. Plan Q limits
elective deferrals as necessary to comply with section 401(a)(30) and
415, and also provides that no highly compensated employee may make an
elective deferral at a rate that exceeds 10% of compensation. However,
Plan Q also provides that a catch-up eligible participant is permitted
to defer amounts in excess of 10% during the plan year up to the
applicable dollar catch-up limit for the year. In 2006, Participants B
and C are both 55 years old and, pursuant to the catch-up provision in
Plan Q, both elect to defer 10% of compensation plus a pro-rata portion
of the \$5,000 applicable dollar catch-up limit for 2006. Participant B
continues this election in effect for the entire year, for a total
elective contribution for the year of \$17,000. However, in July 2006,
after deferring \$8,500, Participant C discontinues making elective
deferrals.

\(ii\) Once Participant B's elective deferrals for the year exceed the
section 401(a)(30) limit (\$15,000), subsequent elective deferrals are
treated as catch-up contributions as they are deferred, provided that
such elective deferrals do not exceed the catch-up contribution limit
for the taxable year. Since the \$2,000 in elective deferrals made after
Participant B reaches the section 402(g) limit for the calendar year
does not exceed the applicable dollar catch-up limit for 2006, the
entire \$2,000 is treated as a catch-up contribution.

\(iii\) As of the last day of the plan year, Participant B has exceeded
the employer-provided limit of 10% (10% of \$120,000 or \$12,000 for
Participant B) by an additional \$3,000. Since the additional \$3,000 in
elective deferrals does not exceed the \$5,000 applicable dollar
catch-up limit for 2006, reduced by the \$2,000 in elective deferrals
previously treated as catch-up contributions, the entire \$3,000 of
elective deferrals is treated as a catch-up contribution.

\(iv\) In determining Participant B's ADR, the \$5,000 of catch-up
contributions are subtracted from Participant B's elective deferrals for
the plan year under paragraph (d)(2)(i) of this section. Accordingly,
Participant B's ADR is 10% (\$12,000 / \$120,000). In addition, for
purposes of applying the rules of section 401(k)(8), Participant B is
treated as having elective deferrals of \$12,000.

\(v\) Participant C's elective deferrals for the year do not exceed an
applicable limit for the plan year. Accordingly, Participant C's \$8,500
of elective deferrals must be taken into account in determining
Participant C's ADR for purposes of section 401(k)(3).

[Example 3]{.underline}. (i) The facts are the same as in [Example
2]{.underline}, except that Plan Q is amended to change the maximum
permitted deferral percentage for highly compensated employees to 7%,
effective for deferrals after April 1, 2006. Participant B, who has
earned \$40,000 in the first 3 months of the year and has been deferring
at a rate of 10% of compensation plus a pro-rata portion of the \$5,000
applicable dollar catch-up limit for 2006, reduces the 10% of pay
deferral rate to 7% for the remaining 9 months of the year (while
continuing to defer a pro-rata portion of the \$5,000 applicable dollar
catch-up limit for 2006). During those 9 months, Participant B earns
\$80,000. Thus, Participant B's total elective deferrals for the year
are \$14,600 (\$4,000 for the first 3 months of the year plus \$5,600
for the last 9 months of the year plus an additional \$5,000 throughout
the year).

\(ii\) The employer-provided limit for Participant B for the plan year
is \$9,600 (\$4,000 for the first 3 months of the year, plus \$5,600 for
the last 9 months of the year). Accordingly, Participant B's elective
deferrals for the year that are in excess of the employer-provided limit
are \$5,000 (the excess of \$14,600 over \$9,600), which does not exceed
the applicable dollar catch-up limit of \$5,000.

\(iii\) Alternatively, Plan Q may provide that the employer-provided
limit is determined as the time-weighted average of the different
deferral percentage limits over the course of the year. In this case,
the time-weighted average limit is 7.75% for all participants, and the
applicable limit for Participant B is 7.75% of \$120,000, or \$9,300.
Accordingly, Participant B's elective deferrals for the year that are in
excess of the employer-provided limit are \$5,300 (the excess of
\$14,600 over \$9,300). Since the amount of Participant B's elective
deferrals in excess of the employer-provided limit (\$5,300) exceeds the
applicable dollar catch-up limit for the taxable year, only \$5,000 of
Participant B's elective deferrals may be treated as catch-up
contributions. In determining Participant B's actual deferral ratio, the
\$5,000 of catch-up contributions are subtracted from Participant B's
elective deferrals for the plan year under paragraph (d)(2)(i) of this
section. Accordingly, Participant B's actual deferral ratio is 8%
(\$9,600 / \$120,000). In addition, for purposes of applying the rules
of section 401(k)(8), Participant B is treated as having elective
deferrals of \$9,600.

[Example 4]{.underline}. (i) The facts are the same as in [Example
1]{.underline}. In addition to Participant A, Participant D is a highly
compensated employee who is eligible to make elective deferrals under
Plan P. During 2006, Participant D, who is 60 years old, elects to defer
\$14,000.

\(ii\) The ADP test is run for Plan P (after excluding the \$3,000 in
catch-up contributions from Participant A's elective deferrals), but
Plan P needs to take corrective action in order to pass the ADP test.
After applying the rules of section 401(k)(8)(C) to allocate the total
excess contributions determined under section 401(k)(8)(B), the maximum
deferrals which may be retained by any highly compensated employee in
Plan P is \$12,500.

\(iii\) Pursuant to paragraph (b)(1)(iii) of this section, the ADP limit
under Plan P of \$12,500 is an applicable limit. Accordingly, \$1,500 of
Participant D's elective deferrals exceed the applicable limit.
Similarly, \$2,500 of Participant A's elective deferrals (other than the
\$3,000 of elective deferrals treated as catch-up contributions because
they exceed the section 401(a)(30) limit) exceed the applicable limit.

\(iv\) The \$1,500 of Participant D's elective deferrals that exceed the
applicable limit are less than the applicable dollar catch-up limit and
are treated as catch-up contributions. Pursuant to paragraph (d)(2)(iii)
of this section, Plan P must retain Participant D's \$1,500 in elective
deferrals and Plan P is not treated as failing to satisfy section
401(k)(8) merely because the elective deferrals are not distributed to
Participant D.

\(v\) The \$2,500 of Participant A's elective deferrals that exceed the
applicable limit are greater than the portion of the applicable dollar
catch-up limit (\$2,000) that remains after treating the \$3,000 of
elective deferrals in excess of the section 401(a)(30) limit as catch-up
contributions. Accordingly, \$2,000 of Participant A's elective
deferrals are treated as catch-up contributions. Pursuant to paragraph
(d)(2)(iii) of this section, Plan P must retain Participant A's \$2,000
in elective deferrals and Plan P is not treated as failing to satisfy
section 401(k)(8) merely because the elective deferrals are not
distributed to Participant A. However, \$500 of Participant A's elective
deferrals can not be treated as catch-up contributions and must be
distributed to Participant A in order to satisfy section 401(k)(8).

[Example 5]{.underline}. (i) Participant E is a highly compensated
employee who is a catch‑up eligible participant under a section 401(k)
plan, Plan R, with a plan year ending October 31, 2006. Plan R does not
limit elective deferrals except as necessary to comply with section
401(a)(30) and section 415. Plan R permits all catch‑up eligible
participants to defer an additional amount equal to the applicable
dollar catch-up limit for the year (\$5,000) in excess of the section
401(a)(30) limit. Participant E did not exceed the section 401(a)(30)
limit in 2005 and did not exceed the ADP limit for the plan year ending
October 31, 2005. Participant E made \$3,200 of deferrals in the period
November 1, 2005 through December 31, 2005 and an additional \$16,000 of
deferrals in the first 10 months of 2006, for a total of \$19,200 in
elective deferrals for the plan year.

\(ii\) Once Participant E=s elective deferrals for the calendar year
2006 exceed \$15,000, subsequent elective deferrals are treated as
catch-up contributions at the time they are deferred, provided that such
elective deferrals do not exceed the applicable dollar catch-up limit
for the taxable year. Since the \$1,000 in elective deferrals made after
Participant E reaches the section 402(g) limit for the calendar year
does not exceed the applicable dollar catch-up limit for 2006, the
entire \$1,000 is a catch-up contribution. Pursuant to paragraph
(d)(2)(i) of this section, \$1,000 is subtracted from Participant E=s
\$19,200 in elective deferrals for the plan year ending October 31, 2006
in determining Participant E\'s ADR for that plan year.

\(iii\) The ADP test is run for Plan R (after excluding the \$1,000 in
elective deferrals in excess of the section 401(a)(30) limit), but Plan
R needs to take corrective action in order to pass the ADP test. After
applying the rules of section 401(k)(8)(C) to allocate the total excess
contributions determined under section 401(k)(8)(C), the maximum
deferrals that may be retained by any highly compensated employee under
Plan R for the plan year ending October 31, 2006 (the ADP limit) is
\$14,800.

\(iv\) Under paragraph (d)(2)(ii) of this section, elective deferrals
that exceed the section 401(a)(30) limit under Plan R are also
subtracted from Participant E\'s elective deferrals under Plan R for
purposes of applying the rules of section 401(k)(8). Accordingly, for
purposes of correcting the failed ADP test, Participant E is treated as
having contributed \$18,200 of elective deferrals in Plan R. The amount
of elective deferrals that would have to be distributed to Participant E
in order to satisfy section 401(k)(8)(C) is \$3,400 (\$18,200 minus
\$14,800), which is less than the excess of the applicable dollar
catch‑up limit (\$5,000) over the elective deferrals previously treated
as catch‑up contributions under Plan R for the taxable year (\$1,000).
Under paragraph (d)(2)(iii) of this section, Plan R must retain
Participant E=s \$3,400 in elective deferrals and is not treated as
failing to satisfy section 401(k)(8) merely because the elective
deferrals are not distributed to Participant E.

\(v\) Even though Participant E\'s elective deferrals for the calendar
year 2006 have exceeded the section 401(a)(30) limit, Participant E can
continue to make elective deferrals during the last 2 months of the
calendar year, since Participant E\'s catch‑up contributions for the
taxable year are not taken into account in applying the section
401(a)(30) limit for 2006. Thus, Participant E can make an additional
contribution of \$3,400 (\$15,000 minus (\$16,000 minus \$4,400))
without exceeding the section 401(a)(30) for the calendar year and
without regard to any additional catch-up contributions. In addition,
Participant E may make additional catch-up contributions of \$600 (the
\$5,000 applicable dollar catch‑up limit for 2006, reduced by the
\$4,400 (\$1,000 plus \$3,400) of elective deferrals previously treated
as catch‑up contributions during the taxable year). The \$600 of
catch-up contributions will not be taken into account in the ADP test
for the plan year ending October 31, 2007.

[Example 6]{.underline}. (i) The facts are the same as in [Example
5]{.underline}, except that Participant E exceeded the section
401(a)(30) limit for 2005 by \$1,300 prior to October 31, 2005, and made
\$600 of elective deferrals in the period November 1, 2005, through
December 31, 2005 (which were catch-up contributions for 2005). Thus,
Participant E made \$16,600 of elective deferrals for the plan year
ending October 31, 2006.

\(ii\) Once Participant E=s elective deferrals for the calendar year
2006 exceed \$15,000, subsequent elective deferrals are treated as
catch-up contributions as they are deferred, provided that such elective
deferrals do not exceed the applicable dollar catch-up limit for the
taxable year. Since the \$1,000 in elective deferrals made after
Participant E reaches the section 402(g) limit for calendar year 2006
does not exceed the applicable dollar catch-up limit for 2006, the
entire \$1,000 is a catch-up contribution.  Pursuant to paragraph
(d)(2)(i) of this section, \$1,000 is subtracted from Participant E=s
elective deferrals in determining Participant E\'s ADR for the plan year
ending October 31, 2006. In addition, the \$600 of catch‑up
contributions from the period November 1, 2005 to December 31, 2005 are
subtracted from Participant E\'s elective deferrals in determining
Participant E\'s ADR. Thus, the total elective deferrals taken into
account in determining Participant E=s ADR for the plan year ending
October 31, 2006, is \$15,000 (\$16,600 in elective deferrals for the
current plan year, less \$1,600 in catch-up contributions).

\(iii\) The ADP test is run for Plan R (after excluding the \$1,600 in
elective deferrals in excess of the section 401(a)(30) limit), but Plan
R needs to take corrective action in order to pass the ADP test. After
applying the rules of section 401(k)(8)(C) to allocate the total excess
contributions determined under section 401(k)(8)(C), the maximum
deferrals that may be retained by any highly compensated employee under
Plan R (the ADP limit) is \$14,800.

\(iv\) Under paragraph (d)(2)(ii) of this section, elective deferrals
that exceed the section 401(a)(30) limit under Plan R are also
subtracted from Participant E\'s elective deferrals under Plan R for
purposes of applying the rules of section 401(k)(8). Accordingly, for
purposes of correcting the failed ADP test, Participant E is treated as
having contributed \$15,000 of elective deferrals in Plan R. The amount
of elective deferrals that would have to be distributed to Participant E
in order to satisfy section 401(k)(8)(C) is \$200 (\$15,000 minus
\$14,800), which is less than the excess of the applicable dollar
catch‑up limit (\$5,000) over the elective deferrals previously treated
as catch‑up contributions under Plan R for the taxable year (\$1,000).
Under paragraph (d)(2)(iii) of this section, Plan R must retain
Participant E=s \$200 in elective deferrals and is not treated as
failing to satisfy section 401(k)(8) merely because the elective
deferrals are not distributed to Participant E.

\(v\) Even though Participant E\'s elective deferrals for calendar year
2006 have exceeded the section 401(a)(30) limit, Participant E can
continue to make elective deferrals during the last 2 months of the
calendar year, since Participant E\'s catch‑up contributions for the
taxable year are not taken into account in applying the section
401(a)(30) limit for 2006. Thus Participant E can make an additional
contribution of \$200 (\$15,000 minus (\$16,000 minus \$1,200)) without
exceeding the section 401(a)(30) for the calendar year and without
regard to any additional catch-up contributions. In addition,
Participant E may make additional catch-up contributions of \$3,800 (the
\$5,000 applicable dollar catch‑up limit for 2006, reduced by the
\$1,200 (\$1,000 plus \$200) of elective deferrals previously treated as
catch‑up contributions during the taxable year). The \$3,800 of catch-up
contributions will not be taken into account in the ADP test for the
plan year ending October 31, 2007.

[Example 7]{.underline}. (i) Participant F, who is 58 years old, is a
highly compensated employee who earns \$100,000 per year. Participant F
participates in a section 401(k) plan, Plan S, for the first 6 months of
the year and then transfers to another section 401(k) plan, Plan T,
sponsored by the same employer, for the second 6 months of the year.
Plan S limits highly compensated employees' elective deferrals to 6% of
compensation for the period of participation, but permits catch-up
eligible participants to defer amounts in excess of 6% during the plan
year, up to the applicable dollar catch-up limit for the year. Plan T
limits highly compensated employees' elective deferrals to 8% of
compensation for the period of participation, but permits catch-up
eligible participants to defer amounts in excess of 8% during the plan
year, up to the applicable dollar catch-up limit for the
year.  Participant F earned \$50,000 in the first 6 months of the year
and deferred \$6,000 under Plan S. Participant F also deferred \$6,500
under Plan T.

\(ii\) As of the last day of the plan year, Participant F has \$3,000 in
elective deferrals under Plan S that exceed the employer-provided limit
of \$3,000. Under Plan T, Participant F has \$2,500 in elective
deferrals that exceed the employer-provided limit of \$4,000. The total
amount of elective deferrals in excess of employer-provided limits,
\$5,500, exceeds the applicable dollar catch-up limit by \$500.
Accordingly, \$500 of the elective deferrals in excess of the
employer-provided limits are not catch-up contributions and are treated
as regular elective deferrals (and are taken into account in the ADP
test). The determination of which elective deferrals in excess of an
applicable limit are treated as catch-up contributions is permitted to
be made in any manner that is not inconsistent with the manner in which
such amounts were actually deferred under Plan S and Plan T.

[Example 8]{.underline}. (i) Employer X sponsors Plan P, which provides
for matching contributions equal to 50% of elective deferrals that do
not exceed 10% of compensation. Elective deferrals for highly
compensated employees are limited, on a payroll-by-payroll basis, to 10%
of compensation. Employer X pays employees on a monthly basis. Plan P
also provides that elective contributions are limited in accordance with
section 401(a)(30) and other applicable statutory limits. Plan P also
provides for catch-up contributions. Under Plan P, for purposes of
calculating the amount to be treated as catch-up contributions (and to
be excluded from the ADP test), amounts in excess of the 10% limit for
highly compensated employees are determined at the end of the plan year
based on compensation used for purposes of ADP testing (testing
compensation), a definition of compensation that is different from the
definition used under the plan for purposes of calculating elective
deferrals and matching contributions during the plan year (deferral
compensation).

\(ii\) Participant A, a highly compensated employee, is a catch-up
eligible participant under Plan P with deferral compensation of \$10,000
per monthly payroll period. Participant A defers 10% per payroll period
for the first 10 months of the year, and is allocated a matching
contribution each payroll period of \$500. In addition, Participant A
defers an additional \$4,000 during the first 10 months of the year.
Participant A then reduces deferrals during the last 2 months of the
year to 5% of compensation. Participant A is allocated a matching
contribution of \$250 for each of the last 2 months of the plan year.
For the plan year, Participant A has \$15,000 in elective deferrals and
\$5,500 in matching contributions.

\(iii\) A's testing compensation is \$118,000. At the end of the plan
year, based on 10% of testing compensation, or \$11,800, Plan P
determines that A has \$3,200 in deferrals that exceed the 10% employer
provided limit. Plan P excludes \$3,200 from ADP testing and calculates
A's ADR as \$11,800 divided by \$118,000, or 10%. Although A has not
been allocated a matching contribution equal to 50% of \$11,800, because
Plan P provides that matching contributions are calculated based on
elective deferrals during a payroll period as a percentage of deferral
compensation, Plan P is not required to allocate an additional \$400 of
matching contributions to A.

\(i\) [Effective date]{.underline}---(1) [Statutory effective
date]{.underline}. Section 414(v) applies to contributions in taxable
years beginning on or after January 1, 2002.

\(2\) [Regulatory effective date]{.underline}. Paragraphs (a) through
(h) of this section apply to contributions in taxable years beginning on
or after January 1, 2004.

Robert E. Wenzel,

> Deputy Commissioner for Services and Enforcement

Approved: June 27, 2003.

Pamela F. Olson,

Assistant Secretary (Tax Policy)