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Increased Catch-up Limit for ages 60-63 - mandatory?


AMDG

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Hi. Just curious if the change to 414(v) (based on Section 109 of SECURE Act 2.0) is mandatory.  In other words, a plan sponsor may choose to permit age 50 catch-up contributions. If permitted, then *must* the plan permit the full increased catch-up limit for ages 60-63, or *may* the plan impose the same catch-up limit for all age 50 catch-up contributions regardless of age?

Survey says...

TIA for your insights.

 

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18 hours ago, AMDG said:

Riley - Thanks. To clarify, your opinion is that the plan MUST permit the FULL increased catch-up limit for ages 60-63?

I believe so!  Welcome! 

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I have to disagree. Plans are not required to offer catch-up contributions in the first place, and if they do, there is no requirement that they allow the maximum amount of catch-up contributions. The only requirement under 1.414(v)-1(e)(1)(i) is that all catch-up eligible participants must be allowed to make the same dollar amount of catch-up contributions. This will have to be modified for SECURE 2.0 (since some participants will have a higher dollar limit than others) but the reg does not currently specify anywhere that the dollar amount has to be the maximum amount under the current annual limits - presumably the plan could impose a lower limit if it so chooses.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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Here’s the whole text of that subparagraph C.B. Zeller mentions:

Effective opportunity.  An applicable employer plan that offers catch-up contributions and that is otherwise subject to section 401(a)(4) (including a plan that is subject to section 401(a)(4) pursuant to section 403(b)(12)) will not satisfy the requirements of section 401(a)(4) unless all catch-up eligible participants who participate under any applicable employer plan maintained by the employer are provided with an effective opportunity to make the same dollar amount of catch-up contributions. A plan fails to provide an effective opportunity to make catch-up contributions if it has an applicable limit ([for example], an employer-provided limit) that applies to a catch-up eligible participant and does not permit the participant to make elective deferrals in excess of that limit. An applicable employer plan does not fail to satisfy the universal availability requirement of this paragraph (e) solely because an employer-provided limit does not apply to all employees or different limits apply to different groups of employees under paragraph (b)(2)(i) of this section. However, a plan may not provide lower employer-provided limits for catch-up eligible participants.

26 C.F.R. § 1.414(v)-1(e)(1)(i) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.414(v)-1#p-1.414(v)-1(e)(1)(i).

Further, the Treasury department’s rule was made 20 years ago, and interpreted the statute as it was in 2003.

68 Fed. Reg. 40510-40520 (July 8, 2003) https://www.govinfo.gov/content/pkg/FR-2003-07-08/pdf/03-17226.pdf.

A taxpayer is unburdened by that rule to the extent the rule is inconsistent with the current statute as it now (or in the future) applies.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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FWIW this is from Empower and they said not optional.  I have to agree with you guys though I read the statutory language and nothing says a plan is not qualified unless it offers this increased limit, or catch-ups in the first place.  My plan document for sure has a box to say no catch-ups.   

image.thumb.png.0b78da2784e9f227fd9fe1d3c50b00e1.png

Austin Powers, CPA, QPA, ERPA

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Practically speaking, why would an employer choose to not allow participants age 60-63 to make the higher catch-up contribution?  I mean, catch-ups are excluded from 415(c) and NDT and can be excluded from matching contributions.  What am I missing, other than perhaps a vindictive plan sponsor?

Thanks in advance for your engagement!  

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Practically speaking almost no one will do this, but the question is, is it an option. There are a lot of payroll software packages that are very antiquated (I'm sure some still run on DOS). There is not a team of programmers out there working on upgrading those services.  So in order to avoid compliance failures they may just eliminate them altogether.

Anyway, antiquated software is the first thing that comes to mind as an answer to your question (especially one being used on a large scale).

Austin Powers, CPA, QPA, ERPA

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Well, theoretically (or maybe practically) speaking, an employer might not want to match these higher catch-up contributions, either for financial reasons or considering it "unfair" to younger catch-up eligible employees, or both. Possibly other reasons I haven't considered.

I'm feeling particularly antiquated myself these days, so I need some reprogramming. Our son was discussing a new "smart" TV with us the other day which I'm not smart enough to understand, and I informed him that he was (A) going to go to the store with me to tell me what I should buy, and (B) he was going to set it all up for us at our house. With what it costs to raise your kids, there needs to be SOME small return on the investment...

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To apply the 60-63 variation, an employer/administrator might need plan-administration software and payroll-administration software that uses a record of each employee’s date-of-birth, relates it to a year, and does this for more than a binary selection.

Before 2025, the software needs only two stages: not-yet-50, and 50-or-older.

To apply the 60-63 variation, the software needs four stages: not-yet-50; 50-59; 60-63; and 64-or-older.

(Some programmers might combine stages 2 and 4, but doing so might require at least one conditional expression.)

Imagine 2025 is approaching and an employer/administrator has software that applies the binary selection between not-yet-50 and at-least-50, but does not (yet) apply the 60-63 and 64-or-older stages. An employer, as a plan’s sponsor, might decide not to provide the 60-63 variation.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Many payroll systems set up records for each employee at the beginning of a new calendar year.  Within those records is a field which is the catch-up limit for the year.  Payroll then tests the limit when each payroll is run by comparing the YTD catch-up amount plus the current payroll period catch-up amount against the limit in the employee's record.  It the YTD number exceeds the limit in the employee's, the current period catch-up amount is reduced to stay within the limit.

To populate the field, the logic to setup the catch-up has been, as Peter notes, to look at the employee's year of birth.  If the employee will not attain 50 during the calendar year, then the catch-up limit is set to zero.  If the employee will attain age 50 during the calendar year, the set up limit will be set to the catch-limit for the calendar that the IRS has published before the start of the new calendar year.

I expect that the IRS will publish a set of catch-up limits for each of the new age groups, and payroll will go through a similar process of determining the catch-up limit for each employee.

The reason many payroll systems use this approach is the current year limit only needs to be determined once at the beginning of the year, and the logic of testing YTD amounts against the limit is the same for all employees.

To summarize, a catch-up limit field for each employee already exists many payroll systems.  To illustrate Peter's stages, the process to update the catch-up limit for each employee as of the beginning of the calendar year needs to have a programming statement that looks something like:

  • If
  • (Calendar_Year-Birth_Year)>=64,IRS_Limit_Age_64            <---this should be the same as the age 50 limit
  • ElseIf (Calendar_Year-Birth_Year)>=60,IRA_Limit_Age_60
  • ElseIf (Calendar_Year-Birth_Year)>=50,IRA_Limit_Age_50
  • Else 0 endif

 

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  • 1 month later...

Some pre-approved plans have the 414(v) limit hard coded to be incorporated by reference, and no option in the adoption agreement to provide a lower limit. So, I think in this situation, the higher limit is mandatory. 

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