Fifteen Year Catch Up

[Guest Ann Marie Hegy]

My understanding is that if a person has worked for a company for 15 years, he or she can make a "catch up" that is equal to the least of:

(1) $3,000;

(2) $15,000, reduced by amounts not included in gross income for prior taxable years by reason of this cap expansion option; or

(3) $5,000 multiplied by years of service, minus all amounts of prior years’ contributions that were due to prior elective deferrals.

The overall lifetime maximum is $15,000

Are participants taking advantage of this, i.e., how common is it?

Are providers of recordkeeping services calculating the catch up and do they store all of the historical data needed to make the calculation?

[Guest Yanikoski]

As a software provider in this area, I can tell you that we get more questions about this topic than any other -- so I am certain that at least some significant portion of eligible participants takes advantage of this provision. In fact, my guess is that may NON-eligible participants also take advantage of it (since many no longer use software, they do not realize that they are not meeting all the criteria you enumerate, or that they work for ineligible not-for-profit organizations).

Prior use of this catchup, up to the $15,000 limit, is generally not so difficult to track, because once participants start using it, they usually continue to do so in consecutive years. Meeting the $5,000/year qualification is much more problematic, though, because (a) the more you use the catchup the more likely you are to exceed this limit, and (b) in principle you need to know your total prior elective deferrals. Pre-EGTRRA, this latter information was also neeced to calculate the Maximum Exclusion Allowance, so that anyone who was even trying to comply was tracking it. Of course, even then, exact data was often simply unavailable, and employers, vendors, and participants were not necessarily all trying very hard. Since EGTRRA, I think we have to assume that fewer people than ever are tracking this data, and so there is more room for error. Since the IRS is continuing to audit plans, however, and since this is one of the things they look at, there is therefore increasing risk of being caught and penalized.

Some plan sponsors do reduce this risk by simply not permitting the $3,000 catchup -- though this doesn't happen as often as you might think, perhaps because the administrators who are in a position to impose such a restriction are also among the employees most likely to want to take advantage of the catchup.

I doubt that anyone has any solid data on these questions, though. And I am sure that what people are doing is all over the lot.

[Ellie Lowder]

Yes, Chuck, I agree. I field hundreds (actually several thousand) calls a year about all aspects of 403(b), 457(b) and related plans - and the 15 year of service limit seems to be increasing in frequency. The IRS tells me that this is the real post-EGTRRA "culprit" in causing excess deferrals because the rules determining eligibility are not clearly understood by all. Clearly, too, many don't realize that only specific employers are eligible for it - e.g., education, hospitals, home health services agencies, health & welfare agencies and religious organizations. Certain 501©(3) employers don't fit any of these categories - thus, it is not available.

[Guest Ann Marie Hegy]

Thanks for the feedback.