Catch Up Contributions - Retirement Plan Administration

Updated 4/14/2015 

We are deep into our “tax season” here at Benefit Resources.  Our clients and their CPAs depend on us to calculate contributions available to their retirement plans.  One special type of contribution is called a Catch Up contribution.  We examine the catch up contributions and answer your questions about when and how catch up contributions apply in this article.

 

WHAT IS A CATCH UP CONTRIBUTION?

A catch up contribution is an additional contribution available to participants in 401(k) plans, 403(b) plans, 457(b) plans, IRAs and SIMPLEs who are age 50 or more (see next question for details).  The catch up contribution is an employee contribution only – the employer cannot make a catch up contribution for a participant.  Generally a catch up contribution is applied when the eligible participant exceeds a plan limit such as:

catch up contributions, saving money for retirement

  • Personal contribution limit
    • For example, Joan (age 52) has made 401(k) deferrals of $20,000 in 2015. Since $18,000 is the personal 401(k) contribution for 2015, $2,000 would be applied as a catch up contribution for 2015.  Note: the 401(k) contributions may be either pre-tax or Roth.
    • For IRA and SIMPLE the catch up would be any amount over the annual contribution limit for the year.
  • Annual contribution limit
    • For example, Sam (age 58) has made 401(k) deferrals of $10,000 in 2015, and his employer makes a profit sharing contribution of $49,000 for a total contribution for Sam of $59,000. Since the annual contribution limit in 2015 is $53,000, $6,000 of Sam’s 401(k) deferral would be applied as catch up.
  • Testing correction – the catch up can be applied to reduce the corrective distribution due to a Highly Compensated Employee if the 401(k) plan fails the Actual Deferral Percentage (ADP) test.
    • For example, Rene, a business owner (age 60) has made $17,000 in 401(k) contributions in 2015. In order for the plan to pass the ADP test, Rene must have $3,000 returned.  That $3,000 can be applied as a catch up contribution, so no funds actually have to be paid out of the plan to correct the test. 

WHO IS ELIGIBLE FOR A CATCH UP CONTRIBUTION?

Any person eligible for the plan who will attain age 50 by the end of the calendar year may make a catch up contribution at any time during the year.  Anyone born in 1965 or earlier is eligible for catch up in 2015.

 For example, Benjamin was born on 12/20/1965.  Benjamin may make a catch up contribution at any time in 2015.

WHAT ARE THE CATCH UP LIMITS FOR 2015? 

In 2015 the maximum catch up limits for the various types of plans are:

  • 401(k)/403(b)/457(b) – $6,000
  • SIMPLE – $3,000
  • IRA – $1,000

Catch up limits are always computed on a calendar year.  If your plan is run on a fiscal year, you may be able to apply two separate calendar year catch up limits in one plan year.  Let your TPA know the amount of deferral each calendar year so that they can accurately compute the catch up contributions.

ARE CATCH UP CONTRIBUTIONS ELIGIBLE FOR THE EMPLOYER MATCH?

Yes, a catch up contribution may be eligible to receive an employer match if the plan document allows for it.

WHEN DID THE CATCH UP RULES GET ENACTED?

The catch up contribution rules are outlined in the Job Creation and Worker Assistance Act of 2002.  Your plan document must include catch up contribution provisions in order for these rules to be applied.

WHAT IS THE REASONING BEHIND THE CATCH UP RULES?

In general, I think that the catch up contribution provisions were enacted to allow employees who are closer to retirement to increase their contributions so they’ll be better able to meet their retirement goals.

SUMMARY

Catch up contributions are a valuable tool for people who are looking to increase their retirement savings, and for us as the plan TPA to use when calculating and testing our clients’ retirement plans. 

 

Are you taking advantage of the catch up provisions?  Is your TPA helping you use catch up contributions to help your plan pass testing?  If you have any questions about catch up contributions, click here to send us a question through our website, or you are welcome to call us between 8:30 and 5:00 Pacific time.


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