(b)lines Ask the Experts – Tips for Correctly Calculating 15-Year Catch-Up

“We have a ton of individuals utilizing the 15-year catch-up election in our 403(b) plan, and for that and other reasons, it would not be practical to eliminate it immediately.

“Until such point that we can get rid of this provision, do the Experts have any suggestions to maximize our chances that the calculations will be performed correctly?”

Michael A. Webb, vice president, Cammack Retirement Group, and David Levine, with Groom Law Group, answer: 

Certainly! Though the 15-year catch-up calculation is extremely difficult, there are some steps you can take in working with the third party performing the calculation (recordkeeper, adviser, etc.) to maximize the chances that the calculation will be performed correctly, as follows:

a) Make certain that all relevant data is obtained—This data is different for each employee, since all elective deferrals from ALL recordkeepers for each year of employment of the employee’s entire working career must be obtained. Do you currently use more than one recordkeeper? Deferrals for each employee for each year must be obtained from each of those vendors for all employees, with aggregation required if an employee used more than one recordkeeper in a calendar year (this includes switching from one recordkeeper to another during the year as well as utilizing two recordkeepers simultaneously). Did you utilize a different recordkeeper 10 years ago? 20 years ago? Well, presuming you have employees with more than 10/20 years of service, you will need detailed annual deferral data for each employee who utilized those vendors so long ago as well. Thus, as you can see, obtaining all the relevant data can be tricky!

b) Make certain that the use of the age-50 and 15-year catch-up elections in prior years is thoroughly documented—For the 15-year catch-up election, this must be done for all years of employment beginning with year 15. For the age-50 catch up, this begins with the calendar year in which the employee turned age 50, but only for years 2002 and later. Why are we mentioning 2002? Well that is the year that an added level of complexity was integrated into the 15-year catch-up election calculation, as if it were not complicated enough. Beginning with that year, since both the age-50 and 15-year catch-up elections could be utilized, deferrals are subject to special ordering rule where deferrals in excess of the basic 402(g) limit for the year in question are considered to be 15-year catch-up contributions until that limit is exhausted, and then age-50 limit deferrals after that. Thus, as pointed out in a prior Ask the Experts column this ordering rule create many situations where a participant THOUGHT he/she was using the age-50 catch-up election when he/she was actually using the 15-year catch-up election. When the participant then attempts to use the 15-year catch-up election in later years, there are excess deferrals since, unbeknownst to the participant, (and often to the recordkeeper/adviser/plan sponsor as well) the 15-year catch-up election was already exhausted. Often, this issue is not discovered until the plan is audited, leading to substantial correction costs for the plan sponsor.

Are you confused yet? We don’t blame you! However, there are professionals out there who are aware of the intricacies of these calculations, and indeed can perform them correctly. If you wish to retain the 15-year catch-up election, it is imperative that you engage those who are subject matter experts in this regard.

Thank you for your question!


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.    

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to rmoore@assetinternational.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.