Michael A. Webb, Vice President, Retirement Services, Cammack LaRhette Consulting, answers:
It is indeed possible, and it can be quite problematic. This issue comes into plan when an individual is eligible for BOTH the age-50 catch-up election AND the 15-year catch-up election. The reason for this is that the IRS has an ordering rule which states that, if the basic 402(g) limit on elective deferrals is exceeded, any excess is attributed to the use of the 15-year catch-up election if a participant is eligible for deferrals under that election, regardless of whether the participant is eligible for the age-50 catch up or not. Thus, if a participant is eligible for both elections, the 15-year catch-up election MUST be calculated even if the intent of the participant was to use the far less complicated age-50 catch up election.
Let’s take an example to illustrate the complexity of the interaction of these limits. Let’s say a participant who is age 50 and otherwise satisfied the requirements of the 15-year catch-up election (has completed 15 years of service, average lifetime deferral with employer does not exceed $5,000, cumulative excesses under the election do not exceed $15,000). He she wishes to utilize the age-50 catch-up to defer $22,000 in 2011 (the $16,500 general limit plus the $5,500 age-50 catch-up).
However, since the participant also qualifies for the 15-year catch-up election, the first $3,000 of the $5,500 excess is considered to be 15-year catch-up contribution (the maximum amount that can be utilized under the 15-year catch-up election), while the remaining $2,500 is attributable to the age-50 catch-up. Since this $3,000 will count against the $15,000 cumulative limit on excesses under the 15-year catch up election, it is possible that, if the participant defers in similar fashion in future years and later wishes to defer under both the 15-year and age-50 catch-up elections, he may find that the 15-year catch-up limit has been exhausted even though he believe that he had never used it!
More importantly, this interaction requires that the 15-year catch-up calculation be performed in such situations, and that calculation is extremely complex and prone to error. A growing number of plan sponsors avoid the calculation entirely by only permitting the age-50 catch-up election, and prohibiting the use of the 15-year catch-up, in their 403(b) plans.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.