401k Plans

<div class="Section1"><br /> <br /> <em>Editor&rsquo;s Note:</em> The SECURE Act has changed the law on mandatory eligibility to include long-term part-time employees. Under prior law, employers were permitted to exclude employees who performed fewer than 1,000 hours of service per year from participation in the employer-sponsored 401(k).&nbsp;The SECURE Act modified this rule in order to expand access for certain part-time employees.&nbsp;Under the new law, nonunion employees who perform at least 500 hours of service for at least three consecutive years (and are at least 21 years old) must be allowed to participate in the employer-sponsored 401(k).&nbsp;The SECURE Act 2.0 reduces the three-year period to two years for tax years beginning after 2024. These long-term, part-time employees may be excluded from coverage and nondiscrimination testing requirements.&nbsp;This SECURE Act provision became effective for plan years beginning after December 31, 2020.&nbsp;However, 12-month periods beginning before January 1, 2021 were not taken into account for purposes of determining whether an employee qualifies.<a href="#_ftn1" name="_ftnref1">¹</a> Therefore, an employer was only required to track part time employees on a going forward basis. However, the same is not true for tracking the vesting of employer contributions, based upon Notice 2020-68.<br /> <br /> <hr><br /> <br /> <strong><strong>Planning Point:</strong></strong> Post-SECURE Act, employers are still permitted to impose certain job-based restrictions on eligibility as long as those restrictions are reasonable and non-discriminatory (i.e., exclusions based on job function or location).&nbsp; Because the new changes have increased scrutiny on the classifications used by employers, employers should be extra cautious to ensure that any classifications are not a backdoor way to circumvent the service requirements.<br /> <br /> <hr><br /> <br /> Section 401(k)(15)(B)(iii) provides special vesting rules for an employee who becomes eligible to participate in a CODA solely by reason of having completed three consecutive 12-month periods during each of which the employee completed at least 500 hours of service (long-term, part-time employee). A long-term, part-time employee must be credited with a year of service for purposes of determining whether the employee has a nonforfeitable right to employer contributions (other than elective deferrals) for each 12-month period during which the employee completes at least 500 hours of service.<a href="#_ftn2" name="_ftnref2">²</a> In addition, Section 401(k)(15)(B)(iii) modifies the break-in-service rules of Section 411(a)(6) for a long-term, part-time employee. The special vesting rules of Section 401(k)(15)(B)(iii) continue to apply to a long-term, part-time employee even if the long-term, part-time employee subsequently completes a 12-month period during which the employee completes at least 1,000 hours of service.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> The IRS has clarified that the rule providing that 12-month periods beginning before January 1,<br /> 2021 are not taken into account does not apply for purposes of the vesting rules. Generally, all years of service with the employer maintaining the plan must be taken into account for purposes of determining a long-term, part-time employee&rsquo;s nonforfeitable right to employer contributions under the special vesting rules. For purposes of determining whether a long-term, part-time employee has a nonforfeitable right to employer contributions (other than elective deferrals), each 12-month period for which the employee has at least 500 hours of service is treated as a year of service. All years of service with the employer maintaining the plan are taken into account for purposes of determining an employee&rsquo;s nonforfeitable right to employer contributions, subject to certain exceptions. Those exceptions include, for example, years of service before the employee attains age 18.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> A plan may not require, as a condition of participation in the cash or deferred arrangement, that an employee complete a period of service beyond the later of age 21 or the completion of one year of service.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> A cash or deferred arrangement must satisfy a nondiscriminatory coverage test ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3842">3842</a>).<a href="#_ftn6" name="_ftnref6">⁶</a> For purposes of applying those tests, all eligible employees are treated as benefiting under the arrangement, regardless of whether they actually make elective deferrals.<a href="#_ftn7" name="_ftnref7">⁷</a> An eligible employee is any employee who is directly or indirectly eligible to make a cash or deferred election under the plan for all or a portion of the plan year. An employee is not ineligible merely because he or she elects not to participate, is suspended from making an election under the hardship withdrawal rules, is unable to make an election because his or her compensation is less than a specified dollar amount, or because he or she may receive no additional annual additions under the IRC<br /> Section 415 limits ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3728">3728</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3868">3868</a>).<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> Employers may apply an early participation test for certain younger or newer employees permitted to participate in a plan. If a plan separately satisfies the minimum coverage rules of IRC Section 410(b), taking into account only those employees who have not completed one year of service or are under age 21, an employer may elect to exclude any eligible nonhighly compensated employees who have not satisfied the age and service requirements for purposes of the ADP test ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3802">3802</a>).<a href="#_ftn9" name="_ftnref9">⁹</a> This provision is designed to encourage employers to allow newer and younger employees to participate in a plan without having the plan&rsquo;s ADP results &ldquo;pulled down&rdquo; by their often-lower rates of deferral. By making this election, an employer will be able to apply a single ADP test comparing the highly compensated employees who are eligible to participate in the plan to the nonhighly compensated who have completed one year of service and reached age 21.<br /> <br /> If an employer includes a tax-exempt 501(c)(3) organization and sponsors both a 401(k) (or 401(m)) plan and a Section 403(b) plan, employees eligible to participate in the Section 403(b) plan generally can be treated as excludable employees for purposes of the 401(k) plan if (1) no employee of the 501(c)(3) organization is eligible to participate in the 401(k) (or 401(m)) plan and (2) at least 95 percent of the employees who are not 501(c)(3) employees are eligible to participate in the 401(k) or 401(m) plan.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> Guidelines and transition rules for satisfying the coverage requirement during a merger or acquisition are set forth at Revenue Ruling 2004-11.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; P.L. 116-94, 133 Stat. 2534 (Dec. 20, 2019), &sect; 112<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect; 401(k)(15)(B)(iii).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect; 401(k)(15)(B)(iv).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Notice 2020-68.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect; 401(k)(2)(D).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect; 401(k)(3)(A)(i).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; Treas. Reg. &sect; 1.410(b)-3(a)(2)(i).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; Treas. Reg. &sect; 1.401(k)-6.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; IRC &sect; 401(k)(3)(F); Treas. Reg. &sect; 1.401(k)-2(a)(1)(iii).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; Treas. Reg. &sect; 1.410(b)-6(g).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp; 2004-7 IRB 480.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> <em>Editor&rsquo;s Note:</em> Late deposits of participant deferrals are one of the most common errors made by employer plans.&nbsp; The Department of Labor (DOL) has announced plans to revise its Voluntary Fiduciary Correction (VFC) Program and prohibited transaction exemption (PTE) 2002-51. Under the proposal, employers would be allowed to self-correct certain late deposits of participant deferrals or loan repayments using the VFC Program. Under the new proposal, self-corrections would be permitted if (1) total lost earnings for the failure do not exceed $1,000 per correction, (2) delinquent contributions were remitted to the plan within 180 days after the date of withholding or receipt, (3) the lost earnings correction amount is computed using the DOL VFC Program calculator, using the actual date of withholding or receipt as the loss date, (4) the company completes an &ldquo;SCC Retention Record Checklist,&rdquo; prepares or collects certain documents, and provides the checklist and documentation to the plan administrator (to be treated as plan records for ERISA purposes), and (5) the company files an electronic notice with the DOL providing information about the correction.<br /> <div class="Section1"><br /> <br /> The IRC limits the total amount of &ldquo;elective deferrals&rdquo; any individual can exclude from income in a year. Elective deferrals, for this purpose, generally include all salary deferral contributions to all 401(k) plans ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3752">3752</a> through Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3779">3779</a>), 403(b) tax sheltered annuities ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4047">4047</a>), SAR-SEPs ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3705">3705</a>), and SIMPLE IRAs ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3706">3706</a>).<a href="#_ftn1" name="_ftnref1">¹</a> Contributions under a Roth 401(k) feature ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3779">3779</a>) are subject to the same elective deferral limit as other 401(k) contributions.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The elective deferral limit for traditional and safe harbor 401(k) plans and for Section 403(b) tax sheltered annuities is $23,500 in 2025 ($23,000 in 2024, $22,500 in 2023, $20,500 in 2022, $19,500 in 2020-2021, as indexed).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> Elective deferral contributions to SIMPLE IRAs ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3706">3706</a>) and SIMPLE 401(k) plans ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3778">3778</a>) are subject to a limit of $16,500 in 2025 ($16,000 in 2024, $15,500 in 2023, $14,000 in 2022, $13,500 in 2020-2021).<a href="#_ftn4" name="_ftnref4">⁴</a> The limit on elective deferrals to tax sheltered annuity plans may be further increased in the case of certain long term employees of certain organizations ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4047">4047</a>).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> The IRC Section 402(g)(1)(B) elective deferral limit is not required to be coordinated with the limit on Section 457 plans. As a result, an individual participating in both a 401(k) plan (or 403(b) plan) and a Section 457 plan in 2025 may defer as much as $47,500 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3584">3584</a>).<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> Matching contributions made on behalf of self-employed individuals generally are not treated as elective deferrals for purposes of IRC Section 402(g)(1)(B). This treatment does not apply to qualified matching contributions that are treated as elective contributions for purposes of the ADP test ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3802">3802</a>).<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> <em>Excess deferrals</em>. Amounts deferred in excess of the ceiling (i.e., excess deferrals) are not excludable and, therefore, must be included in the individual&rsquo;s gross income for the taxable year.<a href="#_ftn8" name="_ftnref8">⁸</a> In the case of participants age 50 or over, catch-up contributions permitted under IRC Section 414(v) are not treated as excess elective deferrals under IRC Section 402(g)(1)(C) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3761">3761</a>).<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> If any amount is included in an individual&rsquo;s income under these rules and plan language permits distributions of excess deferrals, the individual, prior to the first April 15 following the close of the individual&rsquo;s taxable year, may allocate the excess deferrals among the plans under which the deferrals were made and the plans may distribute the excess deferrals (including any income allocated thereto, provided the plan uses a reasonable method of allocating income) not later than the first April 15 after the close of the plan&rsquo;s taxable year <span style="font-weight: 400;">(the April 15 deadline is not extended even if the taxpayer takes advantage of an automatic filing extension)</span>.<a href="#_ftn10" name="_ftnref10">¹⁰</a> The amount of excess deferrals distributed under these rules is not included in income a second time as a distribution, but any income on the excess deferral is treated as earned and received, and includable in income in the taxable year in which distributed.<a href="#_ftn11" name="_ftnref11">¹¹</a> If the plan so provides, distributions of excess deferrals may be made during the taxable year of the deferral if the individual and the plan designate the distribution as an excess deferral and the correcting distribution is made after the date on which the plan received the excess deferral.<a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> Excess amounts that are not timely distributed are not included in the cost basis of plan distributions, even though they have previously been included in income.<a href="#_ftn13" name="_ftnref13">¹³</a> Thus, such amounts will be subjected to a second tax when distributed in the future. Any corrective distribution of less than the entire amount of the excess deferral is treated as a pro rata distribution of excess deferrals and income.<a href="#_ftn14" name="_ftnref14">¹⁴</a><br /> <br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3808">3808</a> for rules on coordinating distributions of excess contributions and excess deferrals.<a href="#_ftn15" name="_ftnref15">¹⁵</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 402(g)(3); Treas. Reg. &sect; 1.402(g)-1(b).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect; 402A(a)(1). Similar rules have recently been adopted with respect to the federal Thrift Savings Plan. 77 Fed. Reg. 26417 (May 4, 2012).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect; 402(g)(1); Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75, Notice 2024-80.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75, Notice 2024-80.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Treas. Reg. &sect; 1.402(g)-1(c).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; <em><em>See</em></em> IRC &sect; 457(c).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; <em><em>See</em> </em>IRC &sect; 402(g)(8).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; IRC &sect; 402(g)(1); Treas. Reg. &sect; 1.402(g)-1(a).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; Treas. Reg. &sect; 1.414(v)-1(g).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; Treas. Reg. &sect;&sect; 1.402(g)-1(e)(2), 1.402(g)-1(e)(5).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp; IRC &sect; 402(g)(2)(C); Treas. Reg. &sect; 1.402(g)-1(e)(8).<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp; Treas. Reg. &sect; 1.402(g)-1(e)(3).<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp; IRC &sect; 402(g)(2); Treas. Reg. &sect; 1.402(g)-1(e)(8).<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.&nbsp; IRC &sect; 402(g)(2)(D); Treas. Reg. &sect; 1.402(g)-1(e)(10).<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>.&nbsp; Treas. Reg. &sect; 1.401(k)-1(f)(5)(i).<br /> <br /> </div><br /> </div><br />

<div class="Section1"><br /> <br /> <em><em>Editor&rsquo;s Note:</em></em> The original SECURE Act extended the deadline to allow qualified retirement plans to be adopted as late as the sponsoring employer&rsquo;s tax filing deadline, including extensions. However, employers could only make elective deferrals to the plan on a prospective basis (meaning that contributions for any given tax year still had to be made before year-end).&nbsp; The SECURE Act 2.0 modified this rule to allow sole proprietors and owners of single member LLCs to make elective deferrals to their solo 401(k) plans up until their tax filing deadline, including extensions, even for the first year the plan is in place. This new rule is effective for plan years beginning after December 29, 2022.<br /> <br /> A solo 401(k) plan refers to any 401(k) plan that covers only the business owner or the business owner and his or her spouse. These plans are subject to the same rules and requirements as any other 401(k) plan. Nondiscrimination testing is not required since the business does not have any common law employees who could have received disparate benefits. Solo 401(k) plans are a product of qualified plan reforms implemented by EGTRRA 2001, which substantially improved the tax favored treatment for employers sponsoring 401(k) plans. These changes were designed to encourage greater savings for retirement and to provide more incentive to businesses funding 401(k) plans.<br /> <br /> The first of these changes increased the deduction limit for profit sharing and stock bonus plans (which includes 401(k) plans) to 25 percent of compensation.<a href="#_ftn1" name="_ftnref1">¹</a> Before 2002, profit sharing and stock bonus plans were subject to a deduction limit of 15 percent of compensation.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> For self-employed individuals, compensation is defined as net earnings less a deduction of 50 percent of self-employment tax and employee contributions. The IRS publishes a separate deduction and rate worksheet for self-employed individuals in Publication 560.<br /> <br /> <hr><br /> <br /> Second, the definition of compensation for purposes of the 25 percent limit includes elective deferrals to a qualified plan, Section 403(b) plan, Section 457 plan, SEP, SIMPLE, or Section 125 FSA plan.<a href="#_ftn2" name="_ftnref2">²</a> This means that the payroll on which the 25 percent is based became higher than it was in earlier years, resulting in a higher deduction limit for employer contributions to the plan.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> If a self-employed individual also participates as an employee in another 401(k) plan, the limits on elective contributions are per individual, not per plan, so the aggregate contributions into all the plans cannot exceed the limit.<br /> <br /> <hr><br /> <br /> After the EGTRRA 2001 amendments, elective deferrals no longer reduce the amount of employer contributions for purposes of calculating the 25 percent deduction limit.<a href="#_ftn3" name="_ftnref3">³</a> This means that a higher amount could be attributable to matching contributions, nonelective contributions or other amounts paid by the employer. The elective deferral limits increased as well: the limit is $23,500 for 2025, up from $23,000 for 2024, $22,500 for 2023, $22,000 in 2022 and $19,500 for 2020-2021 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3760">3760</a>), and, for individuals age 50 or older, catch-up contributions are permitted ($7,500 for 2023-2025 and $6,500 in 2020-2022 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3761">3761</a>)).<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> These changes to the calculation of the employer deduction for all profit sharing plans, including 401(k) plans, led to a proliferation of solo 401(k) plans. Although the advantages to a sole proprietor or one person corporation can be significant, it is important to note that the plan is subject to the same minimum participation, coverage, nondiscrimination, and other requirements that apply to any other qualified defined contribution plan, in the event one or more employees are later added to the sponsoring employer.<br /> <br /> <hr><br /> <br /> Third, total contributions to an employee&rsquo;s account (excluding catch-up contributions) cannot exceed $70,000 in 2025, $69,000 in 2024, $66,000 in 2023, $61,000 in 2022, $58,000 in 2021 and $57,000 in 2020.<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 404(a)(3)(A).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect; 404(a)(12).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect; 404(n).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&sect; 402(g)(1), 414(v)(2)(B); Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75, Notice 2024-80.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75, Notice 2024-80.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> A 401(k) plan generally is a profit sharing plan or stock bonus plan that provides for contributions to be made pursuant to a &ldquo;cash or deferred arrangement&rdquo; (&ldquo;CODA,&rdquo; <em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3755">3755</a>) under which individual participants elect to take either amounts in cash or to have the amounts deferred under the plan. With the availability of Roth contributions under 401(k) plans, the employee also may elect to have Roth deferrals made on an after-tax basis to the CODA.<br /> <br /> In addition to the general qualification requirements ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3838">3838</a> through Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3936">3936</a>), special qualification rules apply to 401(k) plans ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3753">3753</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3808">3808</a>). Certain nondiscrimination requirements can be met by satisfying the requirements for safe harbor plans ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3773">3773</a>). There are requirements for SIMPLE 401(k) plans ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3778">3778</a>) and there are automatic enrollment plans for plan years beginning after 2007 ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3762">3762</a>).<br /> <br /> The elective deferral limits apply to individuals participating in more than one salary reduction plan, such as a 401(k) plan and a Section 403(b) tax sheltered annuity or SIMPLE IRA<br /> ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3760">3760</a>). There also are requirements that pertain to catch-up contributions by participant&rsquo;s age 50 or over ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3761">3761</a>).<br /> <br /> Amounts deferred under a 401(k) plan are referred to as elective deferrals ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3760">3760</a>). Elective deferrals generally are excluded from a participant&rsquo;s gross income for the year of the deferral and are treated as employer contributions to the plan.<a href="#_ftn1" name="_ftnref1">¹</a> In the case of contributions to a qualified Roth contribution program ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3779">3779</a>), deferrals are made on an after-tax basis (i.e., they are treated as includable in income for withholding purposes).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> A 401(k) plan may provide that all employer contributions are made pursuant to the election or may provide that the cash or deferred arrangement is in addition to ordinary employer contributions. Typically, the employer contributions are in the form of a percentage match for each dollar deferred by an employee. There are requirements that apply to matching contributions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3804">3804</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3808">3808</a>).<br /> <br /> Note: On December 16, 2019, the SECURE Act<a href="#_ftn3" name="_ftnref3">³</a> was enacted and made a number of significant changes (some effective immediately upon enactment) to retirement plan rules. Many of these changes impact 401(k) plans and their operations, like the need to annually communicate lifetime income to participants, expansion of mandatory participation to certain long-term part-time employees, and a change in the &ldquo;required beginning date&rdquo; and allowable distribution periods for required minimum distributions. Others reduce the burden and cost for an employer to adopt or maintain a plan.<br /> <br /> A number of legal and regulatory changes prior to the SECURE Act impact certain substantive 401(k) limitation rules regarding hardship, loans and other pre-59&frac12; distributions, especially in the case of areas officially declared to be national disaster areas for hurricanes, floods, fires<br /> Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>), and the COVID-19 pandemic. Some changes, like extension of time to repay 401(k) loans, do not require a disaster justification.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; Treas. Reg. &sect; 1.401(k)-1(a).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect; 402A.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; PL 116-94<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> 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 <a href="javascript:void(0)" class="accordion-cross-reference" id="3760">3760</a>), but also includes amounts deferred to eligible Section 457 governmental plans.<a href="#_ftn1" name="_ftnref1">¹</a> The provisions allowing catch-up contributions are among the retirement amendments of EGTRRA 2001 that became permanent under the Pension Protection Act of 2006 (&ldquo;PPA 2006&rdquo;).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> For purposes of IRC Section 414(v), an applicable employer plan means:<br /> <p style="padding-left: 40px;">(1)&nbsp; employer plans qualified under IRC Section 401(a) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3838">3838</a>);</p><br /> <p style="padding-left: 40px;">(2)&nbsp; Section 403(b) tax sheltered annuities ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4047">4047</a>);</p><br /> <p style="padding-left: 40px;">(3)&nbsp; eligible Section 457 governmental plans (457(b) plans);</p><br /> <p style="padding-left: 40px;">(4)&nbsp; salary reduction simplified employee pensions (i.e., SAR-SEPs ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3705">3705</a>)); and</p><br /> <p style="padding-left: 40px;">(5)&nbsp; SIMPLE IRAs ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3706">3706</a>).<a href="#_ftn3" name="_ftnref3">³</a></p><br /> 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 <a href="javascript:void(0)" class="accordion-cross-reference" id="3935">3935</a>) 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.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> 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&rsquo;s normal retirement year ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3584">3584</a>).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <br /> <em>Dollar limit</em>. 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&rsquo;s compensation as defined in IRC Section 415(c)(3) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3868">3868</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3728">3728</a>) over any other elective deferrals for the year made without regard to the catch-up limits.<a href="#_ftn6" name="_ftnref6">⁶</a> An employer that sponsors more than one plan must aggregate the elective deferrals treated as catch-up contributions for purposes of the dollar limit.<a href="#_ftn7" name="_ftnref7">⁷</a> An individual participating in more than one plan is subject to one annual dollar limit for all catch-up contributions during the taxable year.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> The indexed dollar limit on catch-up contributions to SIMPLE IRAs and SIMPLE 401(k) plans is $3,500 in 2023-2025 and $3,000 in 2015-2022.&nbsp; The SECURE Act 2.0 increased the catch-up contribution limit to $5,000 for taxpayers aged 60, 61, 62 or 63 for tax years beginning after 2024.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> 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 2023 to 2025 and $6,500 in 2020 to 2022. 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 2020-2022 and $7,500 in 2023 to 2025).<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> 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&mdash;and that taxpayers 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.<br /> <br /> 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.<a href="#_ftn11" name="_ftnref11">¹¹</a> 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.&nbsp; 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.<br /> <br /> <hr><br /> <br /> <strong><strong>Planning Point:</strong></strong> As the SECURE Act 2.0 is drafted, once a taxpayer reaches age 64, the lower catch-up contribution limit will once again apply.&nbsp; Additionally, note that the $145,000 limit is a new limit that is not related to the existing definitions for highly-compensated employees.&nbsp; Plans will be required to track this new limit to determine whether any given participant&rsquo;s catch-up contributions must be treated as Roth contributions (the income limit that applies in the definition for highly-compensated employees is $160,000 in 2025).<br /> <br /> <hr><br /> <br /> <strong><strong>Planning Point:</strong> </strong>Employers who wish to offer high-earning employees a catch-up contribution option must first contact their plan recordkeeper to request the changes.&nbsp; 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.&nbsp; Given the number of employers who will be interested in amending their plans to permit Roth catch-up contribution options this year, it&rsquo;s important to act early to avoid delays.<br /> <br /> <hr><br /> <br /> <em>Eligible participant</em>. 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.<a href="#_ftn12" name="_ftnref12">¹²</a> 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&rsquo;s choice of plan year and regardless of whether the participant survives to age 50 or terminates employment prior to his or her birthday.<a href="#_ftn13" name="_ftnref13">¹³</a><br /> <br /> <em>Universal availability</em>. 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.<a href="#_ftn14" name="_ftnref14">¹⁴</a> 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.<a href="#_ftn15" name="_ftnref15">¹⁵</a><br /> <br /> 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 <a href="javascript:void(0)" class="accordion-cross-reference" id="3933">3933</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3935">3935</a>) generally must be aggregated.<a href="#_ftn16" name="_ftnref16">¹⁶</a> Exceptions to the aggregation rule apply to Section 457 plans and certain newly acquired plans.<a href="#_ftn17" name="_ftnref17">¹⁷</a><br /> <br /> Catch-up contributions are excluded from income in the same manner as elective deferrals.<a href="#_ftn18" name="_ftnref18">¹⁸</a> 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.<a href="#_ftn19" name="_ftnref19">¹⁹</a> 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.<a href="#_ftn20" name="_ftnref20">²⁰</a><br /> <br /> 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 <a href="javascript:void(0)" class="accordion-cross-reference" id="3804">3804</a>).<a href="#_ftn21" name="_ftnref21">²¹</a> Reporting requirements for catch-up contributions are set forth in Announcement 2001-93.<a href="#_ftn22" name="_ftnref22">²²</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&sect; 414(v)(5)(B), 414(u)(2)(C) (USERRA rights); Treas. Reg. &sect; 1.414(v)-1(g)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; P.L. 109-280, &sect; 811.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect; 414(v)(6).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect; 414(v)(2)(D).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect; 414(v)(6)(C); Treas. Reg. &sect; 1.414(v)-1(a)(3).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect; 414(v)(2)(A).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; Treas. Reg. &sect; 1.414(v)-1(f)(1).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; Treas. Reg. &sect;&sect; 1.402(g)-2(b), 1.414(v)-1(f)(3).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; IR-2015-118 (Oct. 21, 2015), Notice 2016-62, Notice 2017-64, Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75, Notice 2024-80.<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; IR-2015-118 (Oct. 21, 2015), Notice 2016-62, Notice 2017-64, Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75, Notice 2024-80.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a> Notice 2023-62.<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp; IRC &sect; 414(v)(5).<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp; <em><em>See</em> </em>Treas. Reg. &sect; 1.414(v)-1(g)(3).<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.&nbsp; IRC &sect; 414(v)(4)(A); Treas. Reg. &sect; 1.414(v)-1(e).<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>.&nbsp; Treas. Reg. &sect; 1.414(v)-1(e).<br /> <br /> <a href="#_ftnref16" name="_ftn16">16</a>.&nbsp; IRC &sect; 414(v)(4)(B).<br /> <br /> <a href="#_ftnref17" name="_ftn17">17</a>.&nbsp; Treas. Reg. &sect; 1.414(v)-1(e)(2) and (3).<br /> <br /> <a href="#_ftnref18" name="_ftn18">18</a>.&nbsp; IRC &sect; 402(g)(1)(C).<br /> <br /> <a href="#_ftnref19" name="_ftn19">19</a>.&nbsp; Treas. Reg. &sect; 1.414(v)-1(b)(2).<br /> <br /> <a href="#_ftnref20" name="_ftn20">20</a>.&nbsp; Treas. Reg. &sect; 1.414(v)-1(c).<br /> <br /> <a href="#_ftnref21" name="_ftn21">21</a>.&nbsp; T.D. 9072, 2003-2 C.B. 527.<br /> <br /> <a href="#_ftnref22" name="_ftn22">22</a>.&nbsp; 2001-44 IRB 416.<br /> <br /> </div></div><br />