Issue Snapshot - 401(k) Plan Catch-up Contribution Eligibility

Elective deferrals by a participant in excess of limits imposed under the plan document or by statute are allowed pursuant to IRC Section 414(v) under certain circumstances. These contributions, commonly referred to as “catch-up” contributions, include elective deferrals to a 401(k) plan, 403(b) plan, governmental 457(b) plan, SARSEP, SIMPLE-401(k), and SIMPLE-IRA. This Snapshot analyzes who is eligible to make a catch-up contribution to a 401(k) plan pursuant to IRC Section 414(v).

IRC Sections and Treas. Regulation

• IRC Section 401(a)(30)
• IRC Section 401(k)(3)
• IRC Section 402(g)
• IRC Section 414(v)
• IRC Section 415(c)
• Treas. Reg. Section 1.414(v)-1

Resources

• Notice 2016-62, 2016-46 I.R.B. 725
• Publication 560, Retirement Plans for Small Businesses
• Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)
• Retirement Topics – Catch-up contributions

Analysis

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). Catch-up contributions may be made to a 401(k) plan, a 403(b) plan, a governmental 457(b) plan, a SARSEP, a SIMPLE-401(k) or a SIMPLE-IRA. See IRC Section 414(v) and Treas. Reg. Section 1.414(v)-1. For 2018, the limitation on catch-up contributions to a 401(k) plan, a 403(b) plan, a governmental 457(b) plan and a SARSEP is $6,000. The annual limitation for 2018 on catch-up contributions to a SIMPLE-401(k) and a SIMPLE-IRA is $3,000. See Notice 2016-62. See COLA Increases for Dollar Limitations on Benefits and Contributions for other years.

Analysis limited to 401(k) plans

This Snapshot is limited to a discussion of who is eligible to make a catch-up contribution to a 401(k) plan. A discussion of the general rules regarding catch-up contributions and the specific rules applicable to 403(b) plans, governmental 457(b) plans, SARSEPs, SIMPLE 401(k)s and SIMPLE-IRAs is beyond the scope of this Snapshot.

Applying age 50 rule

A participant who is eligible to make catch-up contributions is referred to in Treas. Reg. 1.414(v)-1(g)(3) as a “catch-up eligible participant.”  A participant is catch-up 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 eligible to make elective deferrals under the plan (without regard to IRC Section 414(v)). (Note that the Code and Regulations specifically refer to a participant’s taxable year, not the calendar year. However, since the taxable year for most individuals is the calendar year, this Snapshot will refer to the participant’s taxable year as the calendar year.)

A 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, if the participant will turn 50 by the end of the calendar year during which the participant makes catch-up contributions.

Example. 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. 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.

Exceeding contribution limits

A catch-up contribution is, generally, an elective deferral made by a catch-up eligible participant that exceeds a statutory limit, a plan-imposed limit, or the ADP limit (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 401(a)(30) (limiting the amount of elective deferrals to the dollar amount in IRC Section 402(g), which is $18,500 for 2018) and IRC Section 415(c) (limiting the annual addition to a participant’s account in a defined contribution plan to the lesser of 100% of the participant’s compensation or $55,000 for 2018). See COLA Increases for Dollar Limitations on Benefits and Contributions for other years.

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.

Example - IRC Section 401(a)(30) limit. Mary 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 2017 plan year, she deferred $24,500 to the plan. The IRC Section 401(a)(30) limit for 2018 is $18,500. The limit on catch-up contributions for 2018 is $6,000. The plan treats $6,000 of Mary’s deferrals as catch-up contributions.

Example - plan-imposed limit. Tom 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 Tom’s deferrals as catch-up contributions.

Example - IRC Section 415(c) limit. Susan 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 401(a)(30) 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. Susan’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. Susan’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 Susan’s elective deferrals as catch-up contributions.  

Audit tips

• Determine if the plan permits catch-up contributions.
• Determine if there is a plan-imposed limit on elective deferrals.
• Review contributions made to the plan to determine if the limitations imposed by IRC Section 401(a)(30), IRC Section 415(c), and/or the plan’s provisions have been exceeded by any participants.
• Review the ADP test to determine the limit for HCEs.
• If any of the “applicable limits” have been exceeded, determine if the participants who made the additional elective deferrals are age 50 or older by the end of the calendar year.
• Review payroll records to ensure the catch-up dollar limitation ($6,000 for 2018) has not been exceeded.

Additional resources

• Retirement Topics - Contributions
• 401(k) and Profit-Sharing Plan Contribution Limits