(b)lines Ask the Experts – Why Age-50 Catch Up Limit Didn’t Increase

November 1, 2011 (PLANSPONSOR (b)lines) – “Thanks for enlightening me in last week’s Ask the Experts column as to why retirement plan contribution limits increase. But I could not help but notice that the age-50 catch-up limit did not increase, but nearly all the other limits increased. Why did this occur?”
By PS

Michael A. Webb, Vice President, Retirement Services, Cammack LaRhette Consulting, answers:  

Good question, and it is related to the indexing that we discussed last week (see (b)lines Ask the Experts – How Are Contribution Limits Set?). At the risk of repeating too much of last week’s column, the increase in the index used for such limits, the Consumer Price Index for all Urban Consumers, or CPI-U, must increase by an amount sufficient for the limit to reach the next rounding increment.   

The problem with the age-50 catch-up is that the amount is indexed in increments of $500, which is a large percentage of $5,500 (9%). Thus, the CPI-U has to increase over 9% for this limit to be raised. Compare that to the 402(g) limit, where the CPI-U only needed to increase by more than 3% ($500 divided by $17,000) for that limit to increase. The CPI-U has increased nowhere near 9% in recent years, so a few years may pass before there is an increase in the age-50 catch-up amount, depending on the rate of future price inflation.   

 

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. 

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