[Code of Federal Regulations]
[Title 26, Volume 5]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.414(v)-1]

[Page 772-781]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.414(v)-1  Catch-up contributions.

    (a) Catch-up contributions--(1) General rule. 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 Sec. 1.402(g)-2.
    (2) Treatment as elective deferrals. 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). 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.

[[Page 773]]

    (b) Elective deferrals that exceed an applicable limit--(1) 
Applicable limits. An applicable limit for purposes of determining 
catch-up contributions for a catch-up eligible participant is any of the 
following:
    (i) Statutory limit. 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. 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. 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--(i) Plan year 
limits--(A) General rule. 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--(1) 
General rule. 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) Alternative definition of compensation permitted. 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) is available regardless of whether the deferral 
percentage limits change during the plan year.
    (ii) Other year limit. In the case of an applicable limit that is 
applied on the basis of a year other than the plan year

[[Page 774]]

(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--(1) General rule. 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--(i) In general. 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:

------------------------------------------------------------------------
                                                            Applicable
             For taxable years beginning in                dollar catch-
                                                             up limit
------------------------------------------------------------------------
2002....................................................          $1,000
2003....................................................           2,000
2004....................................................           3,000
2005....................................................           4,000
2006....................................................           5,000
------------------------------------------------------------------------

    (ii) SIMPLE plans. 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:

------------------------------------------------------------------------
                                                            Applicable
             For taxable years beginning in                dollar catch-
                                                             up limit
------------------------------------------------------------------------
2002....................................................           $ 500
2003....................................................           1,000
2004....................................................           1,500
2005....................................................           2,000
2006....................................................           2,500
------------------------------------------------------------------------

    (iii) Cost of living adjustments. 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. 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--(1) Contributions not taken 
into account for certain limits. 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--(i) Calculation of ADR. 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

[[Page 775]]

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. 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. 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--(i) Application for top-heavy. 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). 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 Sec. 
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. An applicable employer 
plan does not violate Sec. 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 Sec. 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--(1) General rule--(i) 
Effective opportunity. An applicable employer plan

[[Page 776]]

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--(A) Proration of limit. An 
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. 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. 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. 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. If an applicable 
employer plan satisfies the universal availability requirement of this 
paragraph (e) before an acquisition or disposition described in Sec. 
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--(1) 
General rule. 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. 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

[[Page 777]]

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 another right or feature which must satisfy Sec. 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. 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--(1) Applicable employer plan. 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. 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. 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. (i) The terms employer, employee, section 
401(k) plan, and highly compensated employee have the meanings provided 
in Sec. 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. 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. (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. (i) Participants B and C, who are highly compensated 
employees each earning $120,000, are eligible to make elective

[[Page 778]]

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. (i) The facts are the same as in Example 2, 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. (i) The facts are the same as in Example 1. 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.

[[Page 779]]

    (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 
cannot be treated as catch-up contributions and must be distributed to 
Participant A in order to satisfy section 401(k)(8).
    Example 5. (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.

[[Page 780]]

    Example 6. (i) The facts are the same as in Example 5, 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. (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

[[Page 781]]

with the manner in which such amounts were actually deferred under Plan 
S and Plan T.
    Example 8. (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--(1) Statutory effective date. Section 414(v) 
applies to contributions in taxable years beginning on or after January 
1, 2002.
    (2) Regulatory effective date. Paragraphs (a) through (h) of this 
section apply to contributions in taxable years beginning on or after 
January 1, 2004.

[T.D. 9072, 68 FR 40515, July 8, 2003]