Catch-up Contribution

Marguerite Delacroix turns 50 this year. She defers into her employer 401(k) plan and also contributes to a traditional IRA. Assume the elective deferral limit, the IRA contribution limit and both catch-up amounts are the published figures for the year. What does reaching age 50 permit her to do?

1. A.It permits an additional elective deferral in the 401(k) only, and the IRA catch-up becomes available at a later age.Incorrect. The IRA catch-up is also available on attaining age 50; it is simply a separate and smaller amount.
2. B.It permits her to exceed the annual limits only if she failed to contribute the maximum in some earlier year.Incorrect. That describes a make-up provision, which the age-50 catch-up is not. No prior year shortfall is required.
3. C.It permits an additional contribution to the IRA only, since a 401(k) elective deferral limit cannot be exceeded for any reason.Incorrect and reversed. The elective deferral catch-up in the workplace plan is the larger of the two allowances.
4. D.It permits an additional elective deferral above the normal 401(k) limit and, separately, an additional IRA contribution, and she may use both in the same year if the plan allows catch-up contributions.Correct. The workplace and IRA catch-ups are independent allowances, and attaining age 50 at any point in the year qualifies her for the full year.

Why: Once a participant attains age 50 during the calendar year, the tax code permits additional elective deferrals above the normal limit, known as catch-up contributions. The provision applies to workplace elective deferral plans, so a 401(k), a 403(b) and a governmental 457(b) each carry their own catch-up allowance, and there is a SEPARATE and smaller catch-up allowance for IRA contributions. The two are independent: making the workplace catch-up does not consume or reduce the IRA catch-up, and she may use both in the same year if she has sufficient earned income and satisfies the ordinary eligibility rules. Two details commonly trip people up. Attaining age 50 at any point during the year is enough, so a birthday in December qualifies the whole year. And the plan must actually permit catch-up contributions, since the tax code allows them but does not compel a plan to offer them.

Thora Lindqvist has deferred the maximum elective amount into her employer's 401(k) for several years running. She turns 50 during the current plan year and asks her benefits manager whether she may now put in more than the general elective deferral limit. What is correct?

1. A.No; the elective deferral limit is identical for every participant regardless of age.The general limit is uniform, but the Code layers an additional catch-up amount on top of it for participants who reach age 50 during the year.
2. B.Yes, but only if the employer sponsors a defined benefit plan.Catch-up contributions belong to elective deferral arrangements such as 401(k), 403(b) and governmental 457(b) plans. Defined benefit plans have no elective deferrals to catch up on.
3. C.Yes, but only after she separates from service.Nothing about the catch-up depends on separation from service. It is an in-plan contribution made by an active participant through payroll deferral.
4. D.Yes; participants who reach age 50 during the year may make an additional catch-up elective deferral above the general limit, if the plan permits it.Correct. The Code allows the extra deferral for participants attaining age 50 by year end, and the plan document must include the feature for it to be available.

Why: The Internal Revenue Code permits a CATCH-UP elective deferral in addition to the general limit for participants who attain age 50 by the end of the calendar year. The catch-up applies to plans such as 401(k), 403(b) and governmental 457(b) arrangements, and to IRAs under a separate rule. The plan document must permit catch-up contributions, and the extra amount is on top of, not part of, the general deferral limit.