This is the time of year when Plan Sponsors and employees are concentrating on open enrollment for voluntary benefits—especially health care plans. Although entry into employer sponsored retirement plans typically can occur throughout the year, more and more clients are incorporating a focus on their retirement benefits. This is especially true for those employees age 50 + who may need to accelerate their retirement savings. Now is the perfect time to remind those employees of their opportunity to take advantage of a catch-up contribution.
How it Works:
- Must be available as a Plan feature—over 90% of Defined Contribution Plans include a catch-up provision
- Only available to participating employees at least age 50 or turning age 50 within the current year
- For 2017 and 2018 the catch-up contribution limit is $6,000
- May be eligible for a matching contribution (depending upon your plan provisions).
- The catch-up contribution is not subject to any other federal or plan limits
- Catch-up contributions are made on top of all current limits—even if a participant has already reached the maximum IRS limit of $18,000 in 2017 and $18,500 for 2018
- If a Plan has restrictions that prevent a participant from contributing the maximum regular contribution, i.e., highly compensated employees (HCEs), they can still make a catch-up contribution
- As a best practice, most vendors encourage the “single-source” method of deduction for catch-up contributions. This allows for the pretax and catch-up contributions to be submitted on the payroll file as the same source/money type. Those that elect to contribute under this provision are validated based on age and deferrals in excess of the regulatory limits are re-classified as catch-up contributions.
- Employers may classify excess 401(k) contributions as catch-ups for HCEs to avoid a refund
The catch-up contribution offers a valuable benefit to both employees age 50 + and employers. However, like so many features of benefit programs, it requires an action by the Plan participant. Your recordkeeper may already have a program in place to nudge those age 50+ participants to activate a catch-up contribution annually. Additionally, participants might be able take action with a mobile device.
Help Employees Who May Need It Most Catch Up
Every additional dollar contributed to a tax-deferred plan has special value for those employees age 50+. This is the perfect time of year to remind them about the availability of this exclusive feature designed to help accelerate savings for those gaining on retirement. However, in order to participate in 2017, participants need to make the election in the current year. As such you may want to inform them of the deadline for the last payroll of the year and how to sign up on the plan website. You can also have your plan recordkeeper target this group with personalized messages indicating how much they could be saving for retirement were they to participate.