For Tax Professionals  
REG-142499-01 October 23, 2001

Catch-Up Contributions for
Individuals Age 50 or Over

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [REG-142499-01] RIN 1545-BA24

TITLE: Catch-Up Contributions for Individuals Age 50 or Over

AGENCY:  Internal Revenue Service (IRS), Treasury.

ACTION:  Notice of proposed rulemaking and notice of public hearing.

SUMMARY:  This document contains proposed regulations that would
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 proposed
regulations would 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 would affect participants eligible to make
elective deferrals under these plans or contracts.  This document
also contains a notice of public hearing on these proposed
regulations.

DATES: Written and electronic comments and requests to speak (with
outlines of oral comments) at a public hearing scheduled for
February 21, 2002, must be received by January 31, 2002.

ADDRESSES: Send submissions to: CC:IT&A:RU (REG-142499-01), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday
through Friday between the hours of 8 a.m. and 5 p.m. to: CC:IT&A:RU
(REG-142499-01), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue, NW., Washington, DC.  Alternatively, taxpayers
may submit comments electronically via the Internet by selecting the
"Tax Regs" option on the IRS Home Page, or by submitting comments
directly to the IRS Internet site at http://www.irs.gov/tax_regs/regslist.html.
The public hearing will be held
in the IRS Auditorium (7th Floor), Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:  Concerning the regulations, R.
Lisa Mojiri-Azad or John T. Ricotta at (202) 622-6060 (not a toll-
free number); concerning submissions and the hearing, and/or to be
placed on the building access list to attend the hearing, Donna
Poindexter, (202) 622-7180 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed regulations under section 414(v)
of the Internal Revenue Code of 1986 (Code).  Section 414(v) was
added by section 631 of the Economic Growth and Tax Relief
Reconciliation Act of 2001 (EGTRRA) (Public Law 107-16) , enacted on
June 7, 2001.  Under section 414(v), an individual age 50 or over is
permitted to make additional elective deferrals (up to a dollar
limit provided in that section) under a plan that otherwise permits
elective deferrals if certain requirements provided under that
section are satisfied.  Section 414(v) also provides that a plan
will not violate any provision of the Code by permitting these
additional elective deferrals to be made.

Explanation of Provisions

    These proposed regulations would implement new section 414(v) by
providing that an employer plan is not treated as violating any
provision of the Code solely because the plan permits a catch-up
eligible participant (as defined in these proposed regulations) to
make catch-up contributions.  Catch-up contributions generally 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, even if the plans provide for
elective deferrals.  If, however, any plan of an employer provides
for catch-up contributions, all plans of the employer that provide
elective deferrals must comply with the universal availability
requirements described below.

A.  Eligibility for Catch-up Contributions

Under these 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 is age 50 or older.  For
purposes of this rule, a participant who is projected to attain age
50 before the end of a calendar year is deemed to be age 50 as of
January 1 of that year.  The effect of this rule is that all
participants who will attain age 50 during a calendar year are
treated the same beginning January 1 of that year, without regard to
whether the participant survives to his or her 50th
birthday or terminates employment during the year and without regard
to the employer's choice of plan year.

    A catch-up eligible participant can make catch-up contributions
under 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 eligible governmental plan, as long as the
participant can otherwise make elective deferrals under the plan or
contract.  For this purpose, elective deferrals include not only
elective deferrals defined in section 402(g)(3), but also any
contribution to a section 457 eligible governmental plan.

B.  Determination of Catch-up Contribution

In describing section 631 of EGTRRA, the Conference report states
that "the otherwise applicable dollar limit on elective deferrals
under a section 401(k) plan, section 403(b) annuity, SEP, or SIMPLE,
or deferrals under a section 457 plan is increased for individuals
who have attained age 50 by the end of the year."  Conf. Rep. No.
107-84, at 236 (2001).  The legislative history to section 631 of
EGTRRA indicates that the intent of Congress in enacting section
414(v) was to allow a catch-up eligible participant to make
additional elective deferrals over and above any otherwise
applicable limit, up to the catch-up contribution limit for the
taxable year.  The proposed regulations would provide that 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).  However, the
regulations would not require that a participant have made elective
deferrals in excess of an otherwise applicable limit in order to be
a catch-up eligible participant.  A plan providing for $1,000 of
catch-up contributions in 2002 could allow a participant who is over
age 50 to make elective deferrals in an amount projected to exceed
the otherwise applicable limit by $1,000 at any time during 2002.

    Under the proposed regulations, catch-up contributions would be
determined by reference to three types of 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 the
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 that is not
a statutory limit.  For example, a limit on elective deferrals of
highly compensated employees to 10% of pay is an employer-provided
limit.  The condition that a 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 have a definite
written program and provide for a definite predetermined formula for
allocating contributions made to the plan.

    For 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 dollar amount of elective deferrals that
may be retained in the plan by a highly compensated employee after
the application of section 401(k)(8)(C) (without regard to section
414(v)).  For example, if after ADP testing, elective deferrals by
highly compensated employees in excess of $8,000 would be required
to be distributed or recharacterized as employee contributions under
the statutory correction set forth under section 401(k)(8)(C), then
the ADP limit is $8,000.  Similar rules apply in the case of a SEP.

    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 example, if a plan limits
elective deferrals to 10% of compensation, then whether the
participant has elective deferrals in excess of 10% of compensation
is determined at the end of the plan year. Similarly, elective
deferrals in excess of the ADP limit are determined as of the end of
the plan year.  For a 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.

    If a plan provides for separate employer-provided limits on
separate portions of compensation during the plan year, the
determination of the amount of elective deferrals in excess of the
employer-provided limit is still made on an annual basis, with the
applicable limit for the year equal to the sum of the dollar limits
that apply to the separate portions of compensation.  This situation
may occur, for example, when the plan sets a deferral percentage
limit for each payroll period.

    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 may
provide, as an alternative rule, 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.
For example, if a plan using this time- weighted average limits
deferrals to 8 percent of compensation during the first half of the
year and 10 percent of compensation for the second half of the year,
the applicable limit will be 9 percent of each employee's plan year
compensation.

    Under the proposed regulations, elective deferrals in excess of
an applicable limit would be treated as catch-up contributions only
to the extent that such elective deferrals do not exceed the catch-
up contribution limit for the taxable year reduced by elective
deferrals previously treated as catch-up contributions for the
taxable year.  The catch-up contribution limit for a taxable year is
generally the applicable dollar catch-up limit for such taxable
year, except that an elective deferral will not be 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 all
plans of the employer, exceeds the participant's compensation
(determined in accordance with section 415(c)(3)).

    These proposed regulations would include a timing rule for
purposes of determining when elective deferrals in excess of an
applicable limit are treated as catch-up contributions.  This rule
is necessary because the maximum amount of catch- up contributions
is based on a participant's taxable year, but the determination of
whether an elective deferral is in excess of an applicable limit is
determined on the basis of a taxable year, plan year, or limitation
year, depending on the underlying limit. Under the proposed
regulations, whether these elective deferrals in excess of an
applicable limit can be treated as catch-up contributions would be
determined as of the last day of the relevant year, except that if
the limit is determined on a taxable or calendar year basis, then
whether elective deferrals in excess of the limit can be treated as
catch-up contributions would be determined at the time they are
deferred. This timing rule 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.  Any amounts deferred after June 30,
2005, that are in excess of the section 401(a)(30) limit for the
2005 calendar year would also be treated as catch-up contributions
at the time they are deferred, up to the catch-up contribution limit
for 2005 reduced by elective deferrals treated as catch-up
contributions as of June 30, 2005.

C.  Treatment of Catch-up Contributions

If an elective deferral is treated as a catch-up contribution, it is
not subject to otherwise applicable limits under the plan and the
plan will not be treated as failing otherwise applicable
nondiscrimination requirements because of the making of catch- up
contributions.  The proposed regulations would provide guidance on
how catch-up contributions under the plan are taken into account for
purposes of these various requirements under the Code.  Under the
proposed regulations, catch-up contributions would not be taken into
account in applying the limits of section 401(a)(30), 401(k)(11),
402(h), 402A(c)(2), 403(b), 404(h), 408(k), 408(p), 415, or 457 to
other contributions or benefits under the plan offering catch-up
contributions or under any other plan of the employer.

    For purposes of ADP testing, the proposed regulations would
provide that any elective deferral for the plan year that is treated
as a catch-up contribution because it is in excess of a statutory
limit or an employer-provided limit is disregarded for purposes of
calculating the participant's actual deferral ratio (i.e., 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 a highly compensated
employee or a nonhighly compensated employee.  If, after running the
ADP test, a plan needs to take corrective action under section
401(k)(8), the plan must determine the amount of elective deferrals
that are catch-up contributions because they are in excess of the
ADP limit.  The elective deferrals that are treated as catch-up
contributions must be retained by the plan.  The plan would not be
treated as failing section 401(k)(8) by reason of this retention of
catch-up contributions.  Excess contributions treated as catch-up
contributions would nevertheless be treated as excess contributions
for purposes of section 411(a)(3)(G).  Therefore, if the plan does
not provide for matching contributions on catch-up contributions,
any matching contributions related to excess contributions treated
as catch-up contributions can be forfeited.  The approach under the
proposed regulations would exclude those catch-up contributions that
can be identified before ADP testing, and allow the plan to treat
elective deferrals as catch-up contributions for those participants
who would be limited under the plan (because the plan otherwise
would be required to distribute some of their elective deferrals),
while minimizing changes to current plan administration.

    Catch-up contributions with respect to the current plan year are
not taken into account for purposes of section 416 or 410(b).
However, catch-up contributions made to the plan in 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).

    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.  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 matching formula 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.

D.  Universal Availability

    Under the proposed regulations, a plan that offers catch-up
contributions would satisfy the requirements of section 401(a)(4)
only if all catch-up eligible participants are provided with the
effective opportunity to make the same dollar amount of catch-up
contributions.  Therefore, if an employer provides for catch-up
contributions under a section 401(k) plan, all other 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.  This universal availability
requirement applies solely with respect to catch-up eligible
participants.  Because the definition of catch-up eligible
participants requires that the participant be eligible to make
elective deferrals under a plan without regard to section 414(v),
the universal availability requirement will not require plans that
do not otherwise provide for elective deferrals to provide for
catch-up contributions.

    In order to provide catch-up eligible participants with an
effective opportunity to make catch-up contributions, the plan would
have to permit 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 effective
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).  However, 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 would not fail the universal availability requirement
solely because an employer-provided limit did not apply to all
employees or different employer-provided limits apply to different
groups of employees. As under current law, a plan could provide for
different employer-provided limits for 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 highly compensated
employees, even though no employer-provided limit applies to
nonhighly compensated employees.  However, a plan is not permitted
to provide lower employer-provided limits for catch-up eligible
participants.

    The proposed regulations would provide several exceptions to
this universal availability requirement.  First, the proposed
regulations would provide 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).  The proposed
regulations would also provide transition rules for collectively
bargained employees and newly-acquired plans.

E.  Participants in Multiple Plans

	As discussed in Section B above, the intent of section 414(v) is
to permit a catch-up eligible participant to make elective deferrals
in an amount equal to the catch- up contribution limit for the year
in addition to the amount of elective deferrals that the participant
would otherwise have been allowed to defer under the plan or plans
in which the catch-up eligible participant participated.  Many of
the statutory limits that would otherwise limit the participant's
elective deferrals are applied on an aggregated basis, for example,
across all plans within a controlled group.  Accordingly, the
proposed regulations would provide that, for purposes of determining
whether elective deferrals are in excess of a statutory limit, all
elective deferrals in excess of the statutory limit are aggregated
in the same manner as the underlying limit and the aggregate amount
of elective deferrals treated as catch-up contributions because they
exceed the statutory limit must not exceed the applicable dollar
catch-up limit.

    For example, compliance with section 401(a)(30) is determined
based on elective deferrals under all section 401(k) plans and all
section 403(b) contracts sponsored by the employer.  Therefore, all
section 401(k) plans and section 403(b) contracts in the controlled
group of the employer would be aggregated for purposes of
determining the total amount of elective deferrals in excess of the
section 401(a)(30) limit.  The amount of elective deferrals treated
as catch-up contributions by reason of exceeding the section 401(a)
(30) limit under the aggregated plans or contracts must not exceed
the dollar amount of the catch-up limit for the taxable year.

    In calculating the actual deferral ratio (ADR) (as defined in
§1.401(k)-1(g)) for a highly compensated employee who
participates in more than one section 401(k) plan of the employer
during the year, all section 401(k) plans are treated as one section
401(k) plan.  Consistent with this approach, if a highly compensated
employee participates in more than one section 401(k) plan of an
employer, in determining the elective deferrals in excess of an
employer-provided limit, the proposed regulations would take into
account the elective deferrals and employer-provided limits under
all section 401(k) plans in which the employee participates.  In
such a case, the proposed regulations would provide that in
determining whether an employee's elective deferrals exceed an
employer-provided limit, the applicable limit for the plan year is
the sum of the dollar amounts of the limits under the separate plans
and the employee's elective deferrals under all these plans are
combined to determine if that aggregate employer-provided limit is
exceeded.

    When the elective deferrals in excess of a statutory or
employer-provided limit would be determined based on more than one
plan, the aggregate amount of elective deferrals in excess of that
limit made under all section 401(k) plans of the employer in which a
catch-up eligible participant who is a highly compensated employee
participates would be treated as elective deferrals in excess of an
applicable limit under each of those section 401(k) plans.  In the
case of a highly compensated employee, all elective deferrals that
exceed a statutory or employer-provided limit and are treated as
catch-up contributions under the section 401(k) plans of the
employer in which the catch-up eligible participant participates are
subtracted from the participant's elective deferrals for purposes of
determining the participant's ADR.  However, if any of the section
401(k) plans corrects through distribution of excess contributions
under section 401(k)(8) in order to comply with section 401(k)(3),
only the catch-up contributions made under that plan are permitted
to be subtracted from elective deferrals for purposes of this
correction.

    When the elective deferrals in excess of a statutory or
employer-provided limit are determined on an aggregated basis, it
must be determined under which plan the elective deferrals in excess
of the limit were made.  The plan under which the elective deferrals
in excess of the limit were made may be determined in any manner
that is not inconsistent with the manner in which such amounts were
actually deferred under the plans.  For example, if a catch-up
eligible participant participates in a section 401(k) plan only
during the first 6 months of the year and during the second 6 months
of the year, while participating in a section 403(b) contract, the
participant's contributions reach and exceed the section 401(a)(30)
limit for the year, then all elective deferrals in excess of the
section 401(a)(30) limit for the year could be treated as made to
the section 403(b) contract.

F.  Excludability of Catch-up Contributions

Catch-up contributions are generally not treated as exceeding the
applicable dollar amount of section 402(g)(1).  The proposed
regulations would also provide that a catch-up eligible participant
who participates in multiple plans may treat an elective deferral as
a catch-up contribution (up to the maximum amount of catch-up
contributions permitted for the taxable year) because it exceeds the
catch-up eligible participant's section 402(g) limit for the taxable
year.  This rule would allow a catch-up eligible participant who
participates in plans of two or more employers an exclusion from
gross income for elective deferrals that exceed the section 402(g)
limit, even though the elective deferrals do not exceed an
applicable limit for either employer's plan.  The treatment by an
individual of such elective deferrals as catch-up contributions will
not have any impact on either employer's plan.  This treatment is
parallel to the treatment of excess deferrals for an individual
under age 50 who exceeds the section 402(g) limit in the plans of
two unrelated employers.  Accordingly, the proposed regulations
would not provide for the ADP test to be rerun to disregard elective
deferrals that an individual treats as catch-up contributions
because they exceed the section 402(g) limit.  However, the total
amount of elective deferrals in excess of the applicable dollar
limit in section 402(g)(1)(B) that are not includible in income
because they are treated as catch-up contributions cannot exceed
that limit by more than the catch-up contribution limit for the
taxable year.

Proposed Effective Date

    The regulations are proposed to apply to contributions in
taxable years beginning on or after January 1, 2002.  Taxpayers may
rely on these proposed regulations for guidance pending the issuance
of final regulations.  If, and to the extent, future guidance is
more restrictive than the guidance in these proposed regulations,
the future guidance will be applied without retroactive effect.

Special Analyses

    It has been determined that this notice of proposed rulemaking
is 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, and because these regulations do not impose a
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 Code, these proposed regulations will be
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final
regulations, consideration will be given to any electronic or
written comments (preferably a signed original and eight (8) copies)
that are submitted timely to the IRS.  In addition to the other
requests for comments set forth in this document, the IRS and
Treasury also request comments on the clarity of the proposed rule
and how it may be made easier to understand.  All comments will be
available for public inspection and copying.

    A public hearing has been scheduled for February 21, 2002, at 10
a.m. in the IRS Auditorium (7th Floor), Internal Revenue Building,
1111 Constitution Avenue NW., Washington, DC.  Due to building
security procedures, visitors must enter at the 10th street
entrance, located between Constitution and Pennsylvania Avenues, NW.
In addition, all visitors must present photo identification to enter
the building.  Because of access restrictions, visitors will not be
admitted beyond the immediate entrance area more than 15 minutes
before the hearing starts.  For information about having your name
placed on the building access list to attend the hearing, see the
"FOR FURTHER INFORMATION CONTACT" section of this preamble.

    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons
who wish to present oral comments at the hearing must submit written
comments and an outline of the topics to be discussed and the time
to be devoted to each topic (signed original and eight (8) copies)
by January 31, 2002.

    A period of 10 minutes will be allotted to each person for
making comments. An agenda showing the scheduling of the speakers
will be prepared after the deadline for receiving outlines has
passed.  Copies of the agenda will be available free of charge at
the hearing.

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. Proposed
Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be 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 1.414(v)-1 is added to read as follows:

§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).
The definitions in paragraphs (a)(2) through (5) of this section
apply for purposes of this section.

    (2) 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.

    (3) 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.

    (4) Catch-up eligible participant--

(i) General rule.  The term catch-up eligible participant means an
employee who--

    (A) Is eligible to make elective deferrals during the plan year
under an applicable employer plan (without regard to section 414(v)
or this section); and

(B) Is age 50 or older.

(ii) Projection of age 50.  For purposes of paragraph (a)(4)(i)(B)
of this section, a participant who is projected to attain age 50
before the end of a calendar year is deemed to be age 50 as of
January 1 of such year.

    (5) Other definitions.

    (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).

    (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)(1)(E), 404(h),
408(k), 408(p), 415, or 457, 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, a plan provision that
limits highly compensated employees to a deferral percentage of 10%
of compensation 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 a highly compensated employee under the rules of section
401(k)(8)(C). In the case of a 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 a
highly compensated employee under the rules of section 408(k)(6).

    (2) Contributions in excess of applicable limit--

(i) Plan year limits.  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 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. This plan provision may
occur, for example, when the plan sets a deferral percentage limit
for each payroll period.  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 may provide, as an alternative rule, 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. Thus, for example, if a plan that provides for
use of a time-weighted average limits deferrals to 8 percent of
compensation during the first half of the plan year and 10 percent
of compensation for the second half of the plan year, the applicable
limit is 9 percent of each employee's plan year compensation.

    (ii) Other year limit.  In the case of an applicable limit which
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--

    (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 this paragraph (c), 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.

    (2) Applicable dollar catch-up limit--

(i) In general.  The applicable dollar catch-up limit for an
applicable employer plan, other than an applicable employer plan
described in section 401(k)(11) or a SIMPLE IRA plan as defined in
section 408(p), is determined under the following table:

       For Taxable Years     Applicable Dollar Catch-
       Beginning in          up Limit

       2002                  $1,000
       2003                  $2,000
       2004                  $3,000
       2005                  $4,000
       2006                  $5,000

    (ii) SIMPLE plan.  The applicable dollar catch-up limit for an
applicable employer plan described in section 401(k)(11) or a SIMPLE
IRA plan as defined in section 408(p) is determined under the
following table:

       For Taxable Years      Applicable Dollar Catch-
       Beginning in           up Limit
    
       2002                   $  500
       2003                   $1,000
       2004                   $1,500
       2005                   $2,000
       2006                   $2,500

    (iii) Cost of living adjustments.  For taxable years 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 during a taxable year, 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 shall
not be taken into account in applying the limits of section 401(a)
(30), 401(k)(11), 402(h), 402A(c)(2), 403(b), 404(h), 408(k),
408(p), 415, or 457 to other contributions or benefits under an
applicable employer plan or any other plan of the employer.

    (2) Contributions not taken into account for certain
    nondiscrimination tests--

(i) Application of ADP test.  Elective deferrals that are treated as
catch-up contributions 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 §1.401(k)-1(g)) of a catch-
up eligible participant.  Similarly, elective deferrals that are
treated as catch-up contributions 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 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 may be forfeited under the rules of section
411(a)(3)(G).

    (iv) Application for top-heavy. Catch-up contributions with
respect to the current plan year are not taken into account for
purposes of section 416.  Thus, if the only contributions made for a
plan year for key employees are catch-up contributions, the
applicable percentage under section 416(c)(2) is 0%, and no top-
heavy minimum contribution under section 416 is required for the
year.  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).

    (v) 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 §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.

    (3) Availability of catch-up contributions.  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)(3)
also apply for purposes of satisfying the requirements of section
403(b)(12).

    (e) Universal availability requirement--
    
    (1) General rule.  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 the effective opportunity to make the
same dollar amount of catch-up contributions.  A plan does not fail
to satisfy this effective opportunity requirement 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.  A plan does not fail 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.

    (2) Exception for section 457 eligible governmental plans.  An
applicable employer plan does not fail to comply with 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).

    (3) Exception for newly acquired plans.  An applicable employer
plan does not fail to comply with the universal availability
requirement of this paragraph (e) merely because another applicable
employer plan does not provide for catch-up contributions, if--

    (i) The other applicable employer plan becomes maintained by the
employer by reason of a merger, acquisition or similar transaction
described in §1.410(b)-2(f); and

    (ii) The other applicable employer plan is amended to provide
for catch-up contributions as soon as practicable, but no later than
by the end of the period described in section 410(b)(6)(C).

    (f) Special rules for an employer that sponsors multiple
plans--(1) General rule. If elective deferrals under more than one
applicable employer plan of an employer are aggregated for purposes
of applying a statutory limit under paragraph (b)(1)(i) of this
section, then the aggregate elective deferrals treated as catch-up
contributions by reason of exceeding that statutory limit under all
such applicable employer plans must not exceed the applicable dollar
catch-up limit for the taxable year.  For example, since compliance
with section 401(a)(30) is determined based on elective deferrals
under section 401(k) plans and section 403(b) contracts sponsored by
the employer, the total amount of elective deferrals under all
section 401(k) plans and section 403(b) contracts of the employer
treated as catch-up contributions by reason of exceeding the section
401(a)(30) limit for a calendar year under the aggregated plans must
not exceed the applicable dollar catch-up limit for such taxable
year.

    (2) Highly compensated employee in more that one section 401(k)
plan.  If a highly compensated employee is a participant in more
than one section 401(k) plan of an employer, in determining whether
the employee's elective deferrals exceed an employer-provided limit
under paragraph (b)(1)(ii) of this section, the employer- provided
limit for the plan year is the sum of the dollar amounts of the
limits under the separate plans for that employee and the employee's
elective deferrals under all section 401(k) plans of the employer
are combined to determine if the employer- provided limit is
exceeded.

    (3) Allocation rules.  When the amount of elective deferrals in
excess of an applicable limit under paragraph (b)(1) of this section
is determined under the aggregation rules of paragraph (f)(1) or (f)
(2) of this section, the aggregate amount of the elective deferrals
in excess of that applicable limit made under all section 401(k)
plans that are aggregated for purposes of determining a highly
compensated employee's ADR are treated as elective deferrals in
excess of an applicable limit for purposes of applying the catch-up
contribution limit under paragraph (c)(1) of this section with
respect to each of these section 401(k) plans.  However, the catch-
up contributions are subtracted from elective deferrals for purposes
of paragraph (d)(2)(ii) of this section only under the applicable
employer plan under which the catch-up contributions are made.  The
applicable employer plan under which the elective deferrals in
excess of an applicable limit are made for purposes of this
paragraph (f)(3) may be determined in any manner that is not
inconsistent with the manner in which such amounts were actually
deferred under the plans.

    (g) Application of section 402(g)--

    (1) Exclusion of catch-up contributions.  In determining the
amount of elective deferrals that are includible in gross income
under section 402(g), except as provided in paragraph (g)(2) of this
section, catch-up contributions are not treated as exceeding the
applicable dollar amount of section 402(g)(1).  For purposes of this
paragraph (g), a catch-up eligible participant who makes elective
deferrals under applicable employer plans of two or more employers
that exceed the applicable dollar amount under section 402(g)(1) may
treat the elective deferrals in excess of that applicable dollar
amount as a catch-up contribution to the extent permitted in
paragraph (g)(2) of this section, even though the elective deferrals
do not exceed an applicable limit under either plan.  Therefore, for
a catch-up eligible participant who makes elective deferrals under
applicable employer plans of two or more employers that exceed the
applicable dollar amount under section 402(g)(1), the elective
deferrals in excess of that applicable dollar amount are excludable
from gross income as catch-up contributions to the extent permitted
in paragraph (g)(2) of this section.  Whether an elective deferral
is treated as a catch-up contribution by an applicable employer plan
is determined under paragraph (c) of this section and without regard
to whether the employee treats an elective deferral as a catch-up
contribution under this paragraph (g).

    (2) Maximum excludable amount.  If a catch-up eligible
participant participates in two or more applicable employer plans
during a taxable year, the total amount of elective deferrals under
all plans that are not includible in gross income under this
paragraph (g) because they are catch-up contributions shall not
exceed the applicable dollar catch-up limit under paragraph (c)(2)
(i) of this section for the taxable year.

    (h) Coordination with other catch-up provisions--

    (1) 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 the additional contributions permitted under section
457(b)(3) applies to such participant.  For additional guidance, see
regulations under section 457.

(2) Coordination with section 402(g)(7). [Reserved].

(i) 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 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
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.

    (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.

    (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, $2000 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.

    (i) Participant E is a catch-up eligible employee 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.  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 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 two months of the calendar year, since Participant E's catch-up
contributions for the taxable year have not exceeded the applicable
dollar catch-up limit for the taxable year.  However, the maximum
amount of elective deferrals Participant E may make for the balance
of the calendar year is $ 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).

   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 actual deferral ratio 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 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 two months
of the calendar year, since Participant E's catch-up contributions
for the taxable year 2006 have not exceeded the applicable dollar
catch-up limit for the taxable year.  However, the maximum amount of
elective deferrals Participant E may make for the balance of the
calendar year is $3,800 (the $5,000 applicable dollar catch-up limit
for 2006, reduced by $1,200 ($1,000 plus $200) in elective deferrals
previously treated as catch-up contributions during taxable year
2006).

    Example 7.

    (i) Participant F, who is 58 years old, is a highly compensated
employee who earns $100,000.  Participant F participates in a
section 401(k) plan, Plan S, for the first six months of the year
and then transfers to another section 401(k) plan, Plan T, sponsored
by the same employer, for the second six 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 employee's 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, who earned $50,000 in the first six months of the
year, defers $5,000 under Plan S.  Participant F also deferred
$5,000 under Plan T.

(ii)  Under paragraph (f)(2) of this section, the employer-provided
limit for Participant F is $7,000, the sum of the employer-provided
limit for Plan S ($3,000) and the employer-provided limit for Plan T
($4,000).   Participant F's elective deferrals for the year are
$10,000.  Therefore, the amount of Participant F's elective
deferrals in excess of the employer-provided limit is $3,000.  Under
paragraph (f)(3) of this section, the $3,000 in excess of the
employer-provided limit is treated as an elective deferral in excess
of that limit under both Plans S and T for purposes of applying the
catch-up contribution limit under paragraph (c)(1) of this section.

    (iii) Since the amount of Participant F's elective deferrals in
excess of the employer-provided limit ($3,000) does not exceed the
applicable dollar catch-up limit for the taxable year, the entire
$3,000 of Participant F's elective deferrals are treated as catch-up
contributions.  In determining Participant F's actual deferral
ratio, the entire $3,000 of catch-up contributions is subtracted
from Participant F's elective deferrals for the plan year under
paragraph (d)(2)(i) of this section.  Accordingly, Participant F's
actual deferral ratio is 7% ($7,000 / $100,000) for both Plans S and
T.

    (iv)  In accordance with paragraph (f)(3) of this section, it is
determined that $2,000 of the excess over the employer-provided
limit was made under Plan S and $1,000 of the excess over the
employer-provided limit was made under Plan T.  This determination
is not inconsistent with the manner in which the elective deferrals
were actually made.  Therefore, under paragraph (d)(2)(ii) of this
section, for purposes of applying the rules of section 401(k)(8),
Participant F is treated as having elective deferrals of $3,000
($5,000-$2,000) in Plan S and $4,000 ($5,000-$1,000) in Plan T.

 (v) If, after applying the ADP test of section 401(k)(3), Plan S or
Plan T were to require correction under section 401(k)(8), the
maximum amount of elective deferrals in excess of the ADP limit that
could be treated as catch-up contributions for Participant F under
the Plan could not exceed $2,000, the applicable dollar catch-up
limit of $5,000, reduced by the $3,000 in excess of the employer-
provided limit previously treated as catch-up contributions for the
taxable year.

    (j) Effective date and transition rule--

    (1) Effective date.  Section 414(v) and this section apply to
contributions in taxable years beginning on or after January 1,
2002.

    (2) Transition rule for collectively bargained employees. An
applicable employer plan will not fail to satisfy the requirements
of paragraph (e) of this section merely because employees eligible
to make elective deferrals who are included in a unit of employees
covered by a collective bargaining agreement in effect on January 1,
2002, are not permitted to make catch-up contributions until the
first plan year beginning after the termination of such agreement.

Deputy Commissioner of Internal Revenue.


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