IRS Issues Final Regulations on Catch-Up Contributions

The Internal Revenue Service has finalized its regulations relating to catch-up contributions to employer-sponsored tax-deferred retirement plans for taxpayers over age 50. The final regulations take the place of proposed regulations issued in the fall of 2001.

Catch-up contributions to tax-deferred plans were introduced in the Economic Growth and Tax Relief Reconciliation Act of 2001. For 2003, eligible taxpayers may contribute as much as $2,000 as a catch-up contribution. The amount will increase by $1,000 each year until it reaches $5,000 by 2006. Although the final regulations for catch-up contributions for the most part follow the rules set out in the proposed regulations, there are some notable differences.

  • Previously, employers were not required to make catch-up provisions available to collectively-bargained employees until expiration of the collective bargaining agreement that was in place at the time catch-up provisions were adopted. Under final regulations, employers are allowed to completely exclude collectively-bargained employees from participation in catch-up provisions.
  • In the case of a merger or acquisition, proposed regulations allowed an employer to adopt a catch-up provision in an acquired plan as soon as practicable following the acquisition, but no later than the end of the plan year following the plan year in which the plan was acquired. Final regulations eliminate the phrase, as soon as practicable, from the rules for acquired plans.

Other provisions in the final regulations confirm the rules set out in the proposed regulations. Final regulations are effective for all employers for tax years beginning on or after January 1, 2004. Employers are permitted to rely on the rules set forth in the final regulations, effective immediately.

You can read the complete text of the final regulations.

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