By: David I Gensler, MSPA, MAAA, EA
The catch-up contribution got its name because it was designed to help older workers “catch up” on contributions they may not have made when they were younger. Simply stated, it is an opportunity to make up for lost time.
Anyone who turns age 50 at any point during a calendar year can make an annual catch-up contribution. In 2017, the catch-up can be as much as an additional $6,000. That is above and beyond the $18,000 401(k) dollar maximum. So an individual turning age 50 during 2017 could defer as much as $24,000 [$18,000 + $6,000].
However, according to research done by Vanguard, only about 16% of plan participants took advantage of the catch-up contribution.
The following are six things that you may not know about catch-up contributions.
1. A plan does not have to allow for catch-ups.
Plans are not required to allow participants to make catch-up contributions. Industry surveys indicate however that most plans do (95% offer it). A simple plan amendment is all that is required to add the necessary language if your plan currently does not have the catch-up provision in it.
2. You have to max out your deferral before you can catch up.
Elective salary deferrals are not treated as catch-up contributions until they exceed the 2017 deferral limit of $18,000 (maybe that is why most plan participants do not take advantage of the catch-up)
3. You do not have to include catch-up contributions in the non-discrimination tests.
This is something that pension geeks like me know about, but most folks not in the retirement plan industry do not know. They are not considered when calculating the ADP non-discrimination test, nor do they factor into the minimum contribution required for a top heavy plan.
4. Catch-up contributions can be part of a participant’s plan loan or hardship distribution.
When calculating a participant’s available loan balance or the amount available for a hardship distribution, catch-up contributions are treated the same as any other pre-tax contributions.
5. Highly Compensated Employees (HCEs) can use the catch-up contribution even if their contributions were capped by the ADP non-discrimination tests.
Catch up contributions are on top of the plan statutory limits. As a result, even if the HCE could not defer any part of the $18,000 limit into the plan because of a failed ADP test (which raises the question as the why the company even has a 401(k) plan in the first place – but that is a topic for another day). So when an ADP test fails, one of the first things that we do is go back and re-characterize deferrals for any HCE over age 50 as a catch-up contribution.
6. You do not have to match catch-up contributions.
Industry surveys however indicate that between 33% – 50% do.
If you are older than age 50 and you want to absolutely maximize every nickel of salary deferrals, do not forget to make sure that your plan allows for catch-up contributions and, if it does, make sure that you take advantage of it