Catch-Up Contributions

What are Catch-Up Contributions?

Catch-up contributions are salary deferrals (also referred to as “elective deferrals”) that employees aged 50 or older can make in addition to regular contributions to their retirement plan.  For plan years beginning after December 31, 2023, catch-up contributions made by employees with income in the previous year in excess of $145,000 must be made as Roth contributions.

Elective deferrals are counted for both the regular annual deferral limit and the catch-up contribution limit on the basis of the calendar year. A deferral is counted for a calendar year only if the wages subject to the deferral election would otherwise have been paid or made available to the employee during the year.

A plan will not treat salary deferrals as catch-up contributions until they exceed the least of the following limits:

  • Any statutory limit, such as the annual limit on regular elective deferrals (for example, $22,500 in 2023 for non-SIMPLE plans)
  • The plan’s actual deferral percentage (ADP) test limit, if applicable
  • The limit imposed by the plan on elective deferrals

What is the Limit for Catch-Up Contributions?

The maximum amount of catch-up contributions that an employee can make is equal to the lesser of the following amounts:

  • The catch-up contribution dollar limit applicable to your plan, as described below
  • Your annual compensation minus your salary deferrals that are not catch-up contributions

Following are the catch-up contribution dollar limits:

  • 401(k) (not SIMPLE), 403(b), governmental 457(b) and SARSEP plans: $7,500 in 2023.
  • SIMPLE plans: $3,500 in 2023.

Who is Eligible?

An employee who is eligible to make salary deferrals under a 401(k), SIMPLE IRA, 403(b), SARSEP or a governmental 457(b) plan may be able to make additional salary deferrals up to the catch-up contribution limit every year provided that:

  • The plan allows catch-up contributions
  • The employee is age 50 or older at any time during the calendar year
  • The employee makes a valid salary deferral election that includes the amount of the catch-up contributions before the end of the calendar year

If an employee is a participant in the plans of unrelated employers, the employee can make elective deferrals in an amount equal to the total of the annual deferral limit plus the catch-up contribution limit, even if neither plan allows catch-up contributions. However, the employee cannot contribute more than the annual deferral limit to any one plan. An example of this situation is an employee, aged 50, who participates in both a 401(k) plan and a 403(b) plan of unrelated employers.

Both plans allow employees to contribute the annual maximum salary deferral limit ($22,500 for 2023) but neither plan allows catch-up contributions ($7,500 for 2023). The employee can still contribute the total amount of $30,000 split between the two plans, but cannot contribute more than $22,500 to either plan.

What Other Rules Apply to Catch-Up Contributions?

Catch-up contributions are not subject to the annual limit on regular elective deferrals, the ADP test limit, or the limit on annual additions to a retirement plan.

Employers sometimes design their retirement plans so that matching contributions are made on catch-up contributions, but this is not required. If catch-up contributions are matched, the matching contributions are subject to all the normally applicable rules, such as the actual contribution percentage (ACP) test.

Can Catch-Up Contributions Be Made to IRAs?

Regardless of whether you make salary deferrals to your employer-sponsored plan, you may be able to make catch-up contributions to your IRA. You are allowed to make IRA contributions for a year up until the due date of your tax return for that year (not including extensions), which for most people is April 15. The combined IRA contribution limit is $6,500 for 2023.

You may also make catch-up IRA contributions for a year if you are age 50 or older before the end of that year. The combined catch-up IRA contribution limit is $1,000 for 2023. However, you may not be able to deduct all or some of your traditional IRA contributions, including catch-up IRA contributions, depending upon the amount of your income, your filing status and if you or your spouse is covered by an employer-sponsored retirement plan. You must also meet certain eligibility requirements to make contributions (including catch-up IRA contributions) to a Roth IRA.

Larger Catch-Up Limits Coming

Section 109 of the Secure 2.0 Act, signed into law by President Biden in December, 2022, provides for larger catch‐up contributions for certain plan participants.  For taxable years beginning after December 31, 2024, participants in a 401(k) plan, who attain age 60, 61, 62, or 63, but not 64, before the end of the taxable year, will be able to make a catch-up contribution equal to the greater of $10,000 or 150% of the regular catch‐up limit.

For participants in a SIMPLE plan, the dollar limit is $5,000.  For plan years beginning after December 31, 2025, the dollar limit is indexed for inflation.

For more information on catch-up contributions or to get a plan started, contact RMC Group today to speak with a Retirement Planning Specialist. Our office can be reached at 239-298-8210 or [email protected].

This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal or financial advice. Design © 2016, 2018 Zywave, Inc. All rights reserved. Provided by RMC Group