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October 1, 2018

Catch-Up Contributions – How Do they Work?

Background

Internal Revenue Code section 414(v) defines eligibility criteria for catch-up contributions.

A catch-up contribution is an elective deferral made by a participant at age 50 or older. It is only available if the participant’s contribution exceeds anyone of three conditions. See Determination of Applicable limit below.

For 2018, the limitation on catch-up contributions is $6000 for 401(k) and 403(b) plans and $3000 for a SIMPLE 401(k) and SIMPLE IRA.

A plan participant is eligible to make a catch-up contribution if these conditions below exist:

1. Participants are age 50 or older

And

2. Participants have exceeded an ‘applicable limit’

Application of the Age 50 Rule

A participant is eligible for catch-up contributions, with respect to a plan year, if the participant turns age 50 by the end of the calendar year, in which the plan year ends and the participant is otherwise eligible to make elective deferrals under the plan. It should be noted that the Internal Revenue Code (IRC) and related regulations specifically, refer to a participant’s taxable year, not the calendar year.

A plan participant is deemed to be age 50 any time during the calendar year in which he turns 50. Thus, in a non-calendar year plan, a participant is permitted to make catch-up contributions even if he will not turn age 50 until the next plan year.

Example of the Age 50 Rule

John will turn age 50 on November 30, 2018 and he participates in a 401(k) plan that permits catch-up contributions. The plan has an October 1st to September 30th plan year. For purposes of catch-up contributions to the plan, John is deemed to be age 50 on January 1, 2018. He is eligible to make a catch-up contribution to the plan for the plan year ending September 30, 2018, even though he will not turn 50 until the following plan year.

Determination of Applicable Limit

A catch-up contribution is, generally, an elective deferral made by a catch-up eligible participant whose contributions to the plan exceed 1) a statutory limit 2) a plan-imposed limit or 3) the ADP limit.

A statutory limit is a legal limitation on the amount of contributions that can be made to a plan. With respect to a 401(k) plan, the relevant statutory limits are set forth in IRC section 402(g), which limits the amount of elective deferrals that can be made annually to a plan ($18,500 for 2018); and IRC section 415(c), which limits the total annual additions to a participant’s account in a defined contribution plan to the lesser of 100% of the participant’s compensation or the applicable dollar limit ($55,000 for 2018).

A plan-imposed limit is a limit on contributions that is set forth in the plan. For example, a provision that limits elective deferrals to 10% of compensation is a plan-imposed limit.

The ADP limit is the limit for HCEs, as determined by the ADP test for the plan year.

Examples of Application of Applicable Limit

IRC section 402(g) limit. Jane is a participant in a 401(k) plan that permits catch-up contributions. She is age 55 and is a catch-up eligible participant. For the 2018 plan year, she deferred $24,500 to the plan. The IRC section 402(g) limit for 2018 is $18,500. The limit on catch-up contributions for 2018 is $6,000. The plan treats $6,000 of Jane’s deferrals as catch-up contributions.

Plan-imposed limit. Roger is a participant in a 401(k) plan that permits catch-up contributions and limits elective deferrals to 10% of a participant’s compensation. He is age 52 and is a catch-up eligible participant. For the 2018 plan year, his compensation was $100,000. He deferred $16,000 to the plan. The plan treats $6,000 of Roger’s deferrals as catch-up contributions.

IRC Section 415(c) limit. Emma is a participant in a 401(k) plan that permits catch-up contributions. She is age 54. Elective deferrals to the plan are permitted up to the IRC Section 402(g) limit ($18,500 for 2018). The plan provides for a matching contribution equal to 25% of her elective deferrals. The plan also permits discretionary profit sharing contributions.

Emma’s compensation for 2018 is $200,000. She deferred $18,500 to the plan. Her matching contribution is $4,625. She receives a discretionary profit sharing contribution in the amount of $35,000. Emma’s total allocation ($18,500 plus $4,625 plus $35,000) exceeds the dollar limitation on annual additions under IRC Section 415(c) by $3,125 ($58,125 less $55,000 is $3,125). The plan treats $3,125 of Emma’s elective deferrals as catch-up contributions.

Conclusion

It is important that the plan document state that catch-up contributions are permitted.

A catch-up contribution is an elective deferral applied to a participant if their contribution exceeds:

A statutory limit
A plan imposed limit
The ADP limit

Robert Gorelick, APA, Founder Benefit Equity Inc.

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