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The Basics on Catch-Up Contributions in 401k PlansCongress 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, 403b 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. Questions: What is a catch-up contribution?
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 ($18,500 in 2018), an employer-imposed plan limit, or any limit applied in order for the plan to satisfy the ADP nondiscrimination test for the year. What is the maximum catch-up contribution allowed? The maximum amount of catch-up contributions that can be contributed in 2018 is $6,000. Who is eligible to make a catch-up contribution? 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. How many retirement plans offer this feature? According to the Plan Sponsor Council of America (www.psca.org), 97.1% of all 401k plans permit catch-up contributions. Are we required to provide this additional elective deferral to our plan participants? No, a plan is generally not required to provide for catch-up contributions. If we want to offer the catch-up provision, does our plan have to be amended? 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. Does the catch-up contributions have to be made from payroll deductions? Yes, contributions must be made by payroll deduction. Does the employer have to match these catch-up contributions? 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 Do we need to show these contributions separately on W-2 forms? No, the IRS has indicated that regular and catch-up contributions can be reported together on W-2 forms. How will catch-up contributions impact plan testing? 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. How are these contributions treated for hardship withdrawals, loans or distributions purposes? 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. Additional Resources 401k Plan Catch-up Contribution Eligibility - Abstract: Elective deferrals by a participant in excess of limits imposed under the plan document or by statute are commonly referred to as "catch-up" contribution. This article analyzes who is eligible to make a catch-up contribution and includes examples. 401k Catch-up Contributions and How They Work - Abstract: For employees who have attained their 49th birthday by December 31 of the previous year, an additional "catch-up" contribution for the calendar year may be made. The catch-up limit is subject to annual Cost of Living adjustments. For 2018, the calendar year limit is $6,000. The catch-up limit applies not only to the Section 402(g) limit, but also to any other limit imposed by the Plan or the IRC. Who Is Eligible to Make 401k Plan Catch-up Contributions? - Abstract: Under certain circumstances, elective deferrals by a plan participant in excess of limits imposed under the plan document or by law are allowed. This article is limited to a discussion of who is eligible to make these "catch-up" contribution to a 401k plan.
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