The Basics on Catch-Up Contributions in 401k Plans
Congress added the new catch-up contribution option to retirement plans out of concern that baby boomers hadn't been saving enough for retirement. This new option enable savers age 50 and over to increase contributions at a time when retirement draws near. Age-50 catch-up contributions are possible in 401k, 403(b) and 457 plans, and IRAs, but the rules differ among plans. This article focuses on 401k rules.
We have put together the answers to some of the most common questions we have been getting regarding the catch-up provision.
What is a catch-up contribution?
A catch-up contribution is any elective deferral made by an eligible participant that is in excess of the statutory limit ($18,000 in 2015), an employer-imposed plan limit, or any limit applied in order for the plan to satisfy the ADP nondiscrimination test for the year.
The maximum amount of catch-up contributions that can be contributed in 2015 is $6,000.
Plan participants who are or will turn 50 years of age during the calendar year are eligible to make catch-up contributions. However, the participant's regular plan contributions must reach at least one of the following limits before catch-up contributions can begin: the annual deferral limit, the plan's deferral limit, or the annual ADP limit for Highly Compensated Employees.
According to the Plan Sponsor Council of America (www.psca.org), 97.1% of all 401k plans permit catch-up contributions.
No, a plan is generally not required to provide for catch-up contributions.
There is a high likelihood that your plan will need to be amended in order for you to allow catch-up contributions. The IRS has provided model amendment language that can be used, but you should immediately check with your legal counsel or recordkeeper on what your specific plan needs.
Yes, contributions must be made by payroll deduction.
No, an employer does not have to match these contributions. According to the Plan Sponsor Council of America (www.psca.org), only 36% of plans allowing catch-up contributions match the contributions. If you don't match, it would be wise to communicate this to your plan participants
No, the IRS has indicated that regular and catch-up contributions can be reported together on W-2 forms.
Among other testing issues, catch-up contributions are not considered when doing the ADP test and they are not considered in determining the amount of the minimum contribution required for a top-heavy plan.
Catch-up contributions to a plan are treated for plan purposes as any other pre-tax contribution would be. For example, catch-up contributions would be treated as any other elective deferral when calculating available balances for loans.
Yes, if one plan of an employer permits catch-up contributions to be made, then catch-up contributions must be permitted in all plans of the employer permitting elective deferrals ("universal availability" requirement). See IRS Notice 2002-4 for more information.
The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.