3761 / What are the rules for catch-up contributions to employer sponsored retirement plans?

Catch-up contributions are defined as additional elective deferrals by an eligible participant in an applicable employer plan, as defined in IRC Section 414(v) and regulations thereunder. Elective deferral for this purpose refers to the amounts described in IRC Section 402(g)(3) ( Q 3760), but also includes amounts deferred to eligible Section 457 governmental plans.¹ The provisions allowing catch-up contributions are among the retirement amendments of EGTRRA 2001 that became permanent under the Pension Protection Act of 2006 (“PPA 2006”).²For purposes of IRC Section 414(v), an applicable employer plan means:

(1) employer plans qualified under IRC Section 401(a) ( Q 3838);

(2) Section 403(b) tax sheltered annuities ( Q 4047);

(3) eligible Section 457 governmental plans (457(b) plans);

(4) salary reduction simplified employee pensions (i.e., SAR-SEPs ( Q 3705)); and

(5) SIMPLE IRAs ( Q 3706).³

For this purpose, qualified plans, Section 403(b) plans, SAR-SEPs, and SIMPLE IRAs that are maintained by a controlled group of corporations, a group of trades or businesses under common control, or members of an affiliated service group ( Q 3935) are considered one plan. In addition, if more than one eligible Section 457 governmental plan is maintained by the same employer, the plans will be treated as one plan.⁴

Catch-up contributions permitted under IRC Section 414(v) do not apply to a catch-up eligible participant for any taxable year in which a higher catch-up amount is permitted under IRC Section 457(b)(3) during the last three years prior to the plan’s normal retirement year ( Q 3584).⁵

Dollar limit. A plan may not permit additional elective deferrals for any year in an amount greater than the lesser of (1) the indexed amount listed below or (2) the excess (if any) of the participant’s compensation as defined in IRC Section 415(c)(3) ( Q 3868, Q 3728) over any other elective deferrals for the year made without regard to the catch-up limits.⁶ An employer that sponsors more than one plan must aggregate the elective deferrals treated as catch-up contributions for purposes of the dollar limit.⁷ An individual participating in more than one plan is subject to one annual dollar limit for all catch-up contributions during the taxable year.⁸

The indexed dollar limit on catch-up contributions to SIMPLE IRAs and SIMPLE 401(k) plans is $3,500 in 2023024 and $3,000 in 2015022. The SECURE Act 2.0 in-creased the catch-up contribution limit to $5,000 for taxpayers aged 60, 61, 62 or 63 for tax years beginning after 2024.⁹

The indexed dollar limit on catch-up contributions to all other 401(k) plans and to Section 403(b) plans, eligible Section 457 plans, and SAR-SEPs is $7,500 in 2023024 and $6,500 in 2020022. The SECURE Act 2.0 increased the catch-up contribution limit to the greater of (1) $10,000 or (2) 150% of the regular catch-up limit for 2024 for taxpayers aged 60, 61, 62 or 63 for tax years beginning after 2024 (up from $6,500 in 2020022 and $7,500 in 2023024).¹⁰

Starting in 2024, if the taxpayer has wages of at least $145,000 from the employer sponsoring the plan in the prior year, the catch-up contribution must be treated as a Roth contribution (the $145,000 limit will also be indexed for inflation). Congress intends to clarify that it only intended this change-and that tax-payers earning less than $145,000 for the prior year can continue to make Roth or pre-tax catch-up contributions. The IRS provided transition relief so that catch-up contributions will satisfy the SECURE 2.0 provisions until at least 2026 even if they are non-Roth contributions made on behalf of high-earning taxpayers.¹¹

The IRS provided transition relief so that catch-up contributions will satisfy the SECURE 2.0 provisions until at least 2026 even if they are non-Roth contributions made on behalf of high-earning taxpayers. Once the new rule does become effective, the IRS clarified that if an employee who is subject to the Roth catch-up requirement elects to make catch-up contributions on a pre-tax basis, the plan sponsor can disregard that election and treat the catch-up as a Roth contribution. When multiple employers sponsor the same 401(k) and an employee has wages from more than one of those employers, the amounts will not be aggregated for purposes of determining whether the employee is subject to the Roth mandate.

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Planning Point: As the SECURE Act 2.0 is drafted, once a taxpayer reaches age 64, the lower catch-up contribution limit will once again apply. Additionally, note that the $145,000 limit is a new limit that is not related to the existing definitions for highly-compensated employees. Plans will be required to track this new limit to determine whether any given participant's catch-up contributions must be treated as Roth contributions (the income limit that applies in the definition for highly-compensated employees is $150,000 in 2023 and $155,000 in 2024).

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Planning Point: Employers who wish to offer high-earning employees a catch-up contribution option must first contact their plan recordkeeper to request the changes. Employers should act now because it can take months for an amendment to be processed and implemented by the recordkeepers and recordkeepers may also limit the number of changes and amendments that they will process in any given year because of staffing constraints. Given the number of employers who will be interested in amending their plans to permit Roth catch-up contribution options this year, it's important to act early to avoid delays.

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Eligible participant. An eligible participant with respect to any plan year is a plan participant who would attain age 50 before the end of the taxable year and with respect to whom no other elective deferrals may be made to the plan for the plan (or other applicable) year as a result of any limit or other restriction.¹² For this purpose, every participant who will reach age 50 during a plan year is treated as having reached age 50 on the first day of the plan year, regardless of the employer’s choice of plan year and regardless of whether the participant survives to age 50 or terminates employment prior to his or her birthday.¹³

Universal availability. A plan will not satisfy the nondiscrimination requirements of IRC Section 401(a)(4) unless all catch-up eligible participants who participate in any applicable plan maintained by the employer are provided with the effective opportunity to make the same election with respect to the dollar limits described above.¹⁴ This is known as the universal availability requirement. A plan will not fail to satisfy this requirement merely because it allows participants to defer an amount equal to a specified percentage of compensation for each payroll period and permits each catch-up eligible participant to defer a pro rata share of the dollar catch-up limit in addition to that amount.¹⁵

For purposes of the universal availability requirement, all plans maintained by employers that are treated as a single employer under the controlled group, common control, or affiliated service group rules ( Q 3933, Q 3935) generally must be aggregated.¹⁶ Exceptions to the aggregation rule apply to Section 457 plans and certain newly acquired plans.¹⁷

Catch-up contributions are excluded from income in the same manner as elective deferrals.¹⁸ The calculation of the elective deferrals that will be considered catch-up contributions generally is made as of the end of the plan year by comparing the total elective deferrals for the plan year with the applicable plan year limit.¹⁹ Elective deferrals in excess of the plan, ADP, or IRC limits, but not in excess of the amount limitations described above, will be treated as catch-up contributions as determined on the last day of the plan year.²⁰

An employer may make, but is not required to make, matching contributions on catch-up contributions. If an employer does so, the contributions must satisfy the ACP test of IRC Section 402(m) ( Q 3804).²¹ Reporting requirements for catch-up contributions are set forth in Announcement 2001-93.²²