When Can an Employee in a 457(b) Plan Use A Three-Year Catch-Up Election?

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

“We are a private university who sponsors, among other plans, a 457(b) plan for our select management and highly compensated employees. The plan contains the three-year catch-up election for employees who are within three years of the normal retirement age of the plan (which in our case is 65). Our question is, can the employee actually use the election in the year in which he/she turns age 65 if he/she qualifies? We have an employee who turns age 65 in 2022 requesting that she use the election, but we think it might be too late for her to use the election, as she would have had to use it in the years that she turned ages 62, 63, and/or 64 if eligible. Are we correct?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A:  This is an excellent question and often a source of confusion in calculating the three-year catch-up, but before we answer, the Experts should provide a bit more background on the three-year catch-up election. As indicated in a prior Ask the Experts column, the three-year catch-up is an election that all 457(b) plan sponsors (governmental and private tax-exempt) MAY include in their 457(b) plans (it is NOT required), where a participant in each of the three calendar years prior to the normal retirement age (as specified in the plan) can contribute the lesser of:

  1. Twice the annual limit ($41,000 in 2022); or
  2. The basic annual limit ($20,500 in 2022) plus the amount of the basic limit not used in prior years.

Thus, if the participant has no unused limitation in prior years (i.e., he/she has always “maxed out” deferrals), the election will be no use, since limit #2 ($19,500 + $0 in unused limit) would always apply. That is why this is a “catch-up” election, as it allows you to catch-up on contributions that you did not make in prior years. The limit may only be used for one three-year period and cannot be used in addition to the age-50 catch-up that applies to governmental plans (private-tax exempt plans cannot use the age-50 catch-up).

To answer your question, yes, the three-year catch-up is only available for the three calendar years prior to the calendar year in which the participant attains the plan’s normal retirement age. So, in your case, if the participant turns age 65 in 2022, the participant could not utilize the three-year catch-up election 2022. She could have only utilized it in 2019, 2020, and 2021. Thus, it is important to plan ahead for possible use of this election, if eligible.

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 Amy.Resnick@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future column.