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Who Is Eligible To Make 401(k) Plan Catch-up Contributions?

Background

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

Under certain circumstances, elective deferrals by a plan participant in excess of limits imposed under the plan document or by law are allowed pursuant to IRC section 414(v). These contributions, commonly referred to as “catch-up” contributions, include elective deferrals to a 401(k) plan, 403(b) plan, governmental 457(b) plan, salary reduction SEP (no longer available after December 31, 1996), SIMPLE-401(k), or SIMPLE-IRA.

A catch-up contribution is an elective deferral made by a participant age 50 or older that exceeds a statutory limit, a plan-imposed limit, or the actual deferral percentage (“ADP”) test limit for highly compensated employees (“HCEs”).  For 2018, the limitation on catch-up contributions are as follows:


Analysis – Who Is Eligible To Make 401(k) Catch-up Contributions

Plan Type Catch-up Contribution Allowed

401(k) plan
403(b) plan
governmental 457(b)
salary reduction SEP

$ 6,000

SIMPLE-401(k)
SIMPLE - IRA

$ 3,000


The analysis in this article is limited to a discussion of who is eligible to make a catch-up contribution to a 401(k) plan. A discussion of the rules regarding catch-up contributions and the specific rules applicable to 403(b) plans, governmental 457(b) plans, salary reduction SEPs, SIMPLE 401(k)s and/or SIMPLE-IRAs is beyond the scope of this article.

A plan participant is eligible to make a catch-up contribution if:

1) they are age 50 or older, and

2) they have exceeded an ‘applicable limit’

both of which are discussed below.  It is important to note that the plan document is not required to allow catch-up contributions; however, if catch up contributions are permitted, it must be so stated.

Application of the Age 50 Rule

A participant is catch-up contribution eligible 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 without regard to IRC section 414(v).   It should be noted that the IRC and related regulations specifically refer to a participant’s taxable year, not the calendar year. However, since the taxable year for virtually all participants is the calendar year, we will assume that the participant’s taxable year is 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. He participates in a 401(k) plan that permits catch-up contributions. The plan has an October 1 to September 30 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 ( each an “applicable 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 and is a catch-up eligible participant. 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 that are allocated pursuant to a predetermined formula set forth in the plan. 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

While the overwhelming majority of 401(k) plan documents provide for catch-up contributions, it is important for plan sponsors to confirm that their plan documents allow catch-up contributions in order to take advantage of the flexibility and advantages they provide for participants over age 50 to contribute more to the plan and keep more in the plan if regulatory or plan limitations are exceeded.

Peter Alwardt is a Tax Partner specializing in employee benefits, tax and ERISA issues for domestic and international clients. He is a member of the American Institute of Certified Public Accountants and NY State Society of CPAs.

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