Please understand that R. Bruce Tanner & Associates will be monitoring your plan for catch up contributions. This information is provided for your general knowledge and ability to answer your participant's questions.

Your plan will automatically adopt the catch up contribution provision if using R. Bruce Tanner & Associates to restate for EGTRRA. Please call our office for clarification of these regulations.

The Internal Revenue Service recently issued proposed regulations that clarify the rules permitting catch up contributions by individuals age 50 or over. The catch up provision was added by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

This provision applies to plan contributions in tax years beginning on or after January 1, 2002. For our clients, this provision impacts 401(k) plans and 403(b) tax sheltered annuity plans.

The catch up amount is limited to $1,000 for the year 2002, then increasing $1,000 per year up to $5,000 for the taxable year of 2006.

A participant must reach one of three limits in order to be eligible for catch up contributions. Following are the limits of the proposed regulations:

• Statutory Limits: 2002 401(k) $11,000 2002 403(b) $11,000

Example: The XYZ Company 401(k) Plan adopted the catch up provisions for the plan year ending December 31, 2002. An employee defers $12,000 during the year; therefore $1,000 is in excess of the Section 402(g) limit which is $11,000 for the year 2002. Since that employee is over 50 years of age, the excess amount of $1,000 will be treated as a catch up contribution.

II. Employer Provided Limit: Your plan document limits deferrals to a specific percentage or dollar amount (i.e. 15% or $5,000 cap).

Example: The XYZ Hospital 403(b) Plan adopted the catch up provisions for the plan year ending December 31, 2002 and also has an imposed 15% limit on the employee deferral amount. An employee contributes 10% for the first quarter of the plan year and 20% during the remainder of the plan year, so that he defers 17.5% of his pay for the year. It is determined at the end of the plan year that the employee has exceeded the plan imposed 15% of pay by 2.5% of pay, or $2,000. In this case, the first $1,000 is treated as a catch up contribution and the remaining amount is a violation of the plan's terms.

III. Actual Deferral Percentage (ADP) Limit: Nondiscrimination Testing Fails

Example: The XYZ Company 401(k) Plan adopted the catch up provisions for the plan year ending March 31, 2004. It has been determined that the plan failed the ADP test for that year. An HCE participant who will be turning age 50 on August 31, 2004 would receive a refund in the amount of $3,200 due to the failure of the ADP test, however, because she is an eligible catch up participant as of January 1, 2004, her refund of excess contributions would only be $200 because the catch up limit for the year 2004 is $3,000.

Fax: (770) 614-4049; R. Bruce Tanner brucetanner@rbtanner.com