Specifically, were they proving to be primarily useful to highly-compensated workers, or were lower-paid workers also finding the provisions helpful as a way to “catch-up” on previously forgone savings opportunities? This week, I asked readers what they were seeing.
At some level, “primarily useful” may have been a poorly worded response option – but, at least according to this week’s responses, even if, on a straight headcount basis more highly-compensated employees (HCEs) are taking advantage of the provision – and perhaps in higher amounts (one reader noted, “Good grief, Charlie Brown, the HCEs have it all” ) – it doesn’t appear to be an HCE-only option. Still, let’s face it – the higher one’s compensation, the easier it is to defer additional amounts. One reader noted, “In our office, catch-up contributions are only helping the highly compensated. Most non-HCE’s have to choose between health care and retirement and some of them can’t even afford the health care.” Another said, “It is hard to imagine widespread use among our production folks who may get to $65,000-$70,000, for whom ‘catch-up’ territory represents 20-30% of gross.” A number of respondents agreed with the sentiments of the reader that observed, “Our HCEs’ regular deferrals are restricted due to poor overall participation, and the catch up allows them to get around this restriction.” Another said, ” To pass our testing, we have had to limit the amount the highly compensated can contribute so the catch-up has helped significantly.”
“Since HCEs are capped from the nondiscrimination tests, the catch-up is viewed more as a way to contribute beyond those limits rather than as an opportunity to save on previously forgone savings,” noted another. “Either way, the lower-paid employees have more opportunity to save (even though they don’t), and the HCEs are happier. Now, if only it were simpler to administer, we’d have a benefits trifecta!”
However, a surprising number of readers (to me, anyway) were very positive about the impact that catch-up contributions were having on workers at all income levels. As one noted, “We have approximately one-third of our catch-up-contribution-eligible population electing catch-up contributions, and most are not in the higher-paid group. The idea that only higher-paid employees are reaching the deferral limits and can afford to make catch-up contributions just isn’t true (at least, in our plan). We think that catch-up-contribution-eligible employees see this as an opportunity to crank up their savings for retirement and want to take advantage of it. Another noted, “90% of my employees ‘catching up’ are highly compensated, but the 10% that are not an HCE are extremely pleased to have the option to save additional funds for their future.”
“In our company, we see both the highly compensated AND the non-highly compensated utilizing the provision,” noted another. “It takes a little more time to explain, but after people understand its purpose, they are excited about being able to put more money away for retirement.”
Another acknowledged, “The catch-up provision is certainly helping higher income people much more than others, but people at a variety of income levels are taking advantage of the opportunity. We have a number of over 50 NHCEs saving between 50% and 75% of their income in their 401(k).”
Readers were ready, willing, and able to provide numbers to back up their observations. Here’s a sampling:
- “In our company, catchups are being utilized by both HCEs and NHCEs, although the HCEs outnumber the NHCE’s 2:1. We send out a mailing in November of each year to all associates who meet or will meet the age criteria for the upcoming year. Out of approximately 1,500 in the age category, only about 131 participate. Of those who do participate, 95% participate at the maximum amount.”
- “In 2005, our 401k plan had 172 active, eligible participants during the plan year, including 16 HCEs, 11 of whom were eligible to make catch-up contributions. Only one of the HCEs eligible for catch up contributions did not contribute the maximum allowed. In contrast, just two of the NHCEs made catch-up contributions.”
- “We have 33 out of 1,300 employees doing catch-up contributions. Twenty-three of the 33 are HCEs using the IRS definition of HCE. Of the 10 NHCEs, all but three earn over $50kâ€¦And only 8 of the 33 are females. So much for the idea of helping working women who were targeted to be helped by this benefit.”
- “In our 401(k) Plan, the catch-up provision is not used very much. In fact, out of about 400 people who are eligible to make catch-up contributions, only 19 do. Interestingly, 10 of those are NHCEs and 9 are HCEs.”
- “Seven employees out of 197 employees here are taking advantage of the catch-up provisions. Only one of these is a highly compensated employee (or 14%).”
- “Each year, a few more NHCEs make the catch-up contribution, but the vast majority are still HCE. Of employees making a catch-up contribution, the percent who are HCE: 2002 – 100%; 2003 – 86%; 2004 – 82%, 2005 – 79%.”
For a number of readers, however helpful the catch-up provisions had been, there were suggestions for better ways to help non-highly compensated workers save more. “I’m not saying I don’t support the concept (I myself take full advantage of it) but it would be nice if Congress could find a way to realistically help lower-income workers prepare for retirement,” said one. “Voluntary participation in defined contribution plans with in-service withdrawals, loan provisions, hardship withdrawals, etc., just isn’t doing the job. I have participants with many years on the job who have less than $10,000 in the Plan because they keep withdrawing it for ‘hardship’ reasons – that qualify technically, but that are really reflections of poor money management skills.”
Other observations included:
- “Catch-up contributions have not helped the average 50-60 year old as much as an expanded savings credit for that age group would do.”
- “The only thing really encouraging lower-income people with retirement saving is the tax credit – that needs to be extended and expanded to people making over $30,000.”
Other interesting comments included:
- “I’m in the over-50 category and, although I am not considered highly compensated, I make a decent salary. Too bad it is not enough to allow me to take advantage of this law.”
- “As for everyone else, I guess we just have to take heart in knowing the income we are attempting to replace in retirement is much smaller for us than for those who are making the catch-ups.”
- “The majority of our catch-uppers are highly compensated. Interestingly enough, the non-highly compensated catch-uppers tend to be single participants. Most importantly, it’s working well for ME.”
But this week’s Editor’s Choice goes to the reader who noted, “It is a great provision to have. Now, if the IRS would simply make ADP/ACP testing less of an issue, that would really be a move in the right direction.”
Thanks to everyone who participated in our survey!
Catch-up contributions are primarily working to the benefit of the more-highly compensated.
Of the 70+ plans I've handled in 2004 and 2005, Catch-Up contributions have helped the highly compensated when problems arise in ADP testing.
What I have found to help the non-highly compensated are the "Bottoms-Up" QNEC contributions. In the right situation, this approach can benefit the NHC while helping the HC in passing ADP tests. This can result in a lower QNEC contribution for the employer.
In our company it is used exclusively by higher paid (not necessarily highly compensated) folks who seem grateful for the added tax break. It is hard to imagine wide spread use among our production folks who may get to $65,000-$70,000, for whom 'catch up' territory represents 20-30% of gross. Was it really intended for rank and file employees?
Only the very highly compensated are benefiting. The rest of us will have to work until we drop dead at our desks (I wonder if that will qualify as a Workers Comp claim?)
The catch-up is used almost exclusively by our highly compensated employees. Our HCE's regular deferrals are restricted due to poor overall participation and the catch up allows them to get around this restriction. Those who utilize the catch-up provision typically contribute the maximum amount.
Interestingly, none of our highly compensated employees had taken advantage of the catch-up provisions until last year -- and that was the CEO -- and he recently announced retirement plans. There were three non-highly compensated employees who used the provision last year
In our company it seems that the 'catch-ups' are being used by the 'higher-ups'.
I'm interested in hearing how it goes in other organizations
From our plan perspective, catch-up contributions seem to be helping folks of all salary ranges. We have approximately one third of our catch-up contribution eligible population electing catch-up contributions and most are not in the higher paid group. The idea that only higher paid employees are reaching the deferral limits and can afford to make catch-up contributions just isn't true (at least, in our plan). We think that catch-up contribution eligible employees see this as an opportunity to crank up their savings for retirement & want to take advantage of it. Surprisingly, it is the non-highly paid that see the need for accelerated savings more than the higher paid.
In our 401(k) Plan, the catch-up provision is not used very much. In fact, out of about 400 people who are eligible to make catch-up contributions, only 19 do. Interestingly, 10 of those are NHCE's and 9 are HCE's.
While we don't have many employees taking advantage of catch-up, we do have several employees taking advantage of the increased regular contribution limits. In fact, since we are no longer subject to the annual additions limitations, we removed the percentage cap of 12% from our 401(k) Plan. This makes it possible for employees to contribute as much as they want, basically, until they reach the $15,000 limit. Because $15,000 per year is a great deal of money to our average associate, most do not contribute that much, but we have 83 who contribute over 12% of pay, and only 5 or 6 of those are HCE's. In fact, we have a part-time, semi-retiree who contributes 90% for about half the year to offset his minimum distributions from his IRAs. This works out great in helping associates to save more for retirement, and helping the Plan pass ADP testing.
I have already written my Congressional representatives!
Catch-up contributions are benefiting only the HCEs. The increase in the deferral limits have helped the NHCE group since most of the plans we administer now offer 50-100% maximum deferral rates which allows the lower paid worker to put more into the plans than pre-EGTRRA but the majority cannot afford to put in the maximum to take advantage of the catch-up limit. It becomes sort of a wash.
I wish it impacted everyone eligible, but in my office it is only utilized by the HCEs and by one person, close to an HCE, who is 9 years from retirement and terrified he will not have enough money.
Here is an interesting way of looking at the provision:
Perhaps the most undervalued job in the world is Motherhood...as women are said to be (statistically) at greater risk of being in poverty during old age. The need to save for retirement may indeed be a 'genderless' issue, but I would say the people that can benefit most from the 'catch-up', are women who quit work to raise a family (and return to the market).
To answer your question directly, I believe in the power of participation; in some respects (DISCLIAMER - not all respects), our retirement system is what you make of it.
Not making much difference at all - but we have a bigger issue - we only have a 29% participation rate in our 401(k) plan!
Primarily it is working to the benefit of the more highly compensated in our plan
In our office, catch up contributions are only helping the highly compensated. Most non-HCE's have to choose between health care and retirement and some of them can't even afford the health care.
Regarding the catch-up provision: As expected, the vast majority of those participating are the highly compensated - the same ones that complained for years that they couldn't put more into their DC account - GO FIGURE!
Having worked primarily on small to mid-size plans (in many business sectors) since catch-up contributions came into practice, of those who take advantage of this benefit, all of them were/are HCE's. I think the main reason for this is affordability; HCE's have the disposable income to make them. Speaking on behalf of those NHCE's with kids, even if I were eligible to make a catch-up contribution, I couldn't afford to. Since we had our kids, I have never been able to make the maximum contribution to my 401k plan, let alone a catch-up. And I am a saver, unlike many Americans!
In 2005, our 401k plan had 172 active, eligible participants during the plan year, including 16 HCEs, 11 of whom were eligible to make catch up contributions. Only one of the HCEs eligible for catch up contributions did not contribute the maximum allowed.
In contrast, just two of the NHCEs made catch up contributions. I doubt that our organization is far from the norm in this regard.
In addition, even though we have been successful in increasing NHCE participation and contribution rates, the increase in annual limits has predictably created a greater gap in the ratio of contributions between the two groups, forcing refunds for the past two years, and presumably for years to come.
Our plan was written to allow up to 60% deferral of salary so the non-highly comp pool can get into the catch-up part of deferral. So far the catch-up has only been used by our highly compensated group. With the 60% deferral we have had two people use it to defer more dollars than our old 15% limit would allow but both were under 50 so catch-up didn't apply for them yet. Before the new limit both deferred the full amount they could, and both are also close to the highly compensated group.
Short answer, no non-highly compensated takers.
We have 33 out of 1300 employees doing catch-up contributions. 23 of the 33 are HCEs using IRS definition of HCE. Of the 10 NHCEs all but 3 earn over $50kâ€¦
In our plan it's definitely the more highly compensated that are benefiting from this provision.
And only 8 of the 33 are females. So much for the idea of helping working women who were targeted to be helped by this benefit
In our plan, the catch-up provisions have primarily benefited highly compensated employees. Our average employees (making between $30k and $50k) rarely get close to the plan limits, so the catch-up provisions rarely come into play for them. I suspect that this is common to most plans.
Regarding the catch-up contribution survey: In our plan, it is primarily helping the HCE. In 2002, 100% of the employees taking advantage of the catch-up contribution were HCE. Each year, a few more NHCE make the catch-up contribution, but the vast majority is still HCE.
Of employees making a catch-up contribution, the percent who are HCE: 2002 - 100%; 2003 - 86%; 2004 - 82%, 2005 - 79%.
Just to give you an idea of who is eligible to make the catch-up, we have approximately 358 employees in 2006 who are or will be age 50 or older this year and who are also enrolled in the 401k. Of these employees, only about 50 or so will be considered HCE this year. I estimate approx. 70% of them will make the catch-up contribution versus only 2 - 3% of NHCE who will make the contribution.
Personally, I see this as mainly benefiting the HCE rather than the average "Joe". With deferral limits and plan provisions as they currently stand, very few "average Joes" can afford to defer enough from their compensation to take advantage of the additional catch-up contribution. A negative paycheck just doesn't fly with the family budget constraints.
Catch up contributions, of course, benefit more highly compensated employees than non-highly compensated employees. Deferring an additional $4k or $5k a year is not possible for the rank and file.
7 employees out of 197 employees here are taking advantage of the catch up provisions. Only 1 of these is a highly compensated employee (or 14%).
We have been very pleasantly surprised by the use of the higher limits by our lower paid employees. Folks over age 50 are apparently beginning to worry about how they are going to pay for groceries when they are 80.
Sorry I missed the deadline for the survey response. I have worked for two companies since the catch-up provisions were enacted and in both cases it was exclusively highly-compensated employees who enrolled. The lower paid people either cannot afford it or don't max out "regular" contributions now anyway.
At our company (a law firm), the "catch up" provisions are helping, as usual, the already well off. Since the catch up doesn't apply until a participant has already reached the underlying maximum, there are only a handful of non-highly compensated individuals who are in a position to save that much money. I'm not saying I don't support the concept (I myself take full advantage of it) but it would be nice if Congress could find a way to realistically help lower income workers prepare for retirement. Voluntary participation in defined contribution plans with in service withdrawals, loan provisions, hardship withdrawals, etc., just aren't doing the job. I have participants with many years on the job who have less than $10,000 in the Plan because they keep withdrawing it for "hardship" reasons - that qualify technically, but that are really reflections of poor money management skills. When is Congress going to wake up and smell the coffee???
When I review data of how many participants actually reach the $14,000/$15,000 limit, the vast majority of those taking advantage of the catch up contributions are highly compensated employees. Catch up contributions have not helped the average 50-60 year old as much as an expanded savings credit for that age group would do.
In our plan, the catch-up is used exclusively by the highly compensated. None of our hourly employees participate in the catch-up as do none of the lower paid salary employees.
I work with a variety of plans for small business- both blue collar and professional groups. Catch up contributions is primarily an advantage for the higher earners. In all the plans I work with combined, I would estimate there are no more than two dozen workers who make under two hundred thousand a year doing catch up. WIth $2.50 a gallon gasoline and the cost of medical care, I don't think many can afford it. The only thing really encouraging lower income people with retirement saving is the tax credit - that needs to be extended and expanded to people making over 30,000.
We have four plans that cover 20,000 employees in the US. The only ones who have benefited from the catch-up are highly compensated. Not sure if it is due to folks spending more then they make or the fact that the average wage is under $10 per hour. Hmmm, not that I think about it maybe it is a combination of both. Could that be why employees buy lottery tickets instead of saving in the 401(k) plan?
Most of the non-highly compensated employees can't afford to maximize their deferrals let alone put in catch-ups. My experience is that only those who don't really NEED to increase contributions are the ones that can afford to do so, and they're taking full advantage of it.
To pass our testing we have had to limit the amount the highly compensated can contribute so the catch-up has helped significantly.
In our company, catchups are being utilized by both HCE's and NHCE's, although the HCE's outnumber the NHCE's 2:1. We send out a mailing in November of each year to all associates who meet or will meet the age criteria for the upcoming year. Out of approximately 1500 in the age category, only about 131 participate. Of those who do participate, 95% participate at the maximum amount.
We have 142 people 50 and over. That's only 17% of our population. Our plan's average age is actually 37. Of those 142, we have 22 participating. Of those 22, 2 are NHCEs. A NHCE has to either defer our plan's max of 30% or hit the $15,000, whichever comes first, to get to participate in the Catch-up. Obviously, the HCEs are taking more advantage of it here of the 22.
I'm always amazed at how few of the 142 actually are taking advantage. I'd say of the 142, a little half are HCEs and most of them still aren't doing it. Most of those HCEs are in our non-qualified plan as well, but we've always encouraged them to max out their 401(k) first. From the ones I've talked to directly about this, they seem to have other investment or savings vehicles outside of work also. They're only prepared to spread their money so far, so it's not always just a case of them not being able to afford it or understanding the need for it.
I think it's a worthwhile program to have, but it is hard or impossible for the lower paid NHCEs to take advantage of.
Across the board, only 0.154% of our eligible over age 50 population has elected catch-up contributions. While very few employees have taken advantage of this feature, it is working to benefit the highly compensated employees far more than the non-highly compensated.
I think the idea of allowing "catch-up" contributions works on paper, but with the rising cost of maintaining a family (fuel prices, cost of goods, cost of education, etc.), it is becoming more and more difficult for our "blue-collar" workers to maximize their DC contributions. I think many of our people see it as another "perk" for the older upper management population vs. the guys loading the trucks, stocking the shelves and even managing the stores.
I'll get off my soap box now, thanks.
The "catch-up contribution" is most popular with the highly compensated. I'm in the over 50 category and although I am not considered highly compensated, I make a decent salary. Too bad it is not enough to allow me to take advantage of this law.
90% of my employees "catching up" are highly compensated, but the 10% that are not an HCE are extremely pleased to have the option to save additional funds for their future.
In our company, we see both the highly compensated AND the non-highly compensated utilizing the provision. It takes a little more time to explain, but after people understand its purpose, they are excited about being able to put more money away for retirement. Everyone is scared that they won't have Social Security Benefits in 10 years.
On the flip side, I have one person who is eligible but won't contribute because the company won't match the funds!
In our plan the catch-up option is mostly used by the highly compensated employees. However one of those was behind in his retirement savings due to financial difficulties and is now able to save more. We have only had about 6 employees use the catch-up contribution option out of about 180 employees. Our maximum contribution limit is 60% of pay and most of our employees don't contribute more than 20% or actually more than the 6% that gets them the maximum match.
In our retail situation, only the part time employees are contributing up to the catch-up limits. Some of them defer their entire pay (after social security tax)!
Good grief, Charlie Brown, the HCEs have it all.
The wording on the catch-up question seems to imply that any weighting of the benefit towards more-highly compensated employees is a bad thing or unfair. I believe that anyone aged 50+ should take advantage of the catch-up to the full extent they can afford. It stands to reason that higher compensated people may be able to afford it more often...that does not mean it is a bad thing.
At our organization, catch up contributions are working for people who are not executives. It is still the small portion of savers who are participating.
Only the HCEs are taking advantage of the catch up contributions provisions. The rest of the 50+ crowd have kids in college. Thanks!
This benefit seems to be skewed to the HCE's.
We have seen it benefit only the HCE and probably isn't being fully utilized.
I think the majority of those who are using the catch up benefit are HCEs. Not only are they the ones who chunk in another $4000 or $5000, but because of the ADP testing rules, the reclassification of excess deferrals to catch up is especially beneficial to the HCEs. It is only on occasion that I see a NHCE make use of catch up. In fact, I would call it rare.
We do have a couple of NHCE's taking advantage of the catch-up feature, but relatively more HCE's make catch-up contributions, as you would expect. However, using the term "catch-up" (included as part of the caption to IRC Sec. 414(v) which provides for the post-50 kicker) to describe the additional employee deferrals permitted for participants age 50 and over is just about as misleading as referring to 401(k) plans as "retirement plans." I mention that because your question begins by asking about the comparative rate of use of "catch-ups" by HCE's and NHCE's, and the concludes with "or is it not really making that much difference at all," suggesting that it could make a difference. Obviously, all else being equal an individual making "catch-up" contributions will end up with a relatively larger plan account, and larger is different from smaller. On the other hand, the term "catch-up" carries the implication that someone who has neglected maximizing his or her 401(k) contribution opportunities pre-age 50 could somehow catch-up to where he would have otherwise been which, of course, in most cases is not going to be true. In our experience the participants making the greatest use of the "catch-up" provisions are those who have maximized their regular 401(k) contributions for many, many years, if not forever, and are now simply padding their accounts with the additional contributions permitted after they reach age 50.
In our experience, it's really only the highly compensated employees who are taking advantage of the catch-up provisions. They're the only ones who can afford to defer the 402(g) limit in the first place (most of our plans removed any percentage deferral limits with the GUST II restatements). Any ADP refunds "recharacterized" as catch-ups would, of course, go to HCEs. And, finally, we do have some plans that fund the entire 415 limit through profit sharing, allowing the HCEs who receive this generous contribution to defer only the catch-up. Oh, and we do administer one plan in which the HCEs are not allowed to defer, except for catch-ups (thus automatically passing the ADP test).
As for everyone else, I guess we just have to take heart in knowing the income we are attempting to replace in retirement is much smaller for us than for those who are making the catch-ups.
It's helping the higher compensated folks...The rich get richer
In our organization employees who do catch-up contributions are generally in the mid-range of compensation, with a few lower-compensated earners also contributing. Interestingly enough the higher compensated people who are eligible aren't participating. It's an attractive option if you can swing the cash flow -- $20K a year can be salted away in your 401(k).
In our plan, exactly no non-highly paid participants are doing the catch-up--but most of the eligible highly paids are. But since HCEs are capped from the non-discrimination tests, the catch-up is viewed more as a way to contribute beyond those limits rather than as an opportunity to save on previously foregone savings. Either way, the lower paid employees have more opportunity to save (even though they don't), and the HCEs are happier. Now if only it were simpler to administer, we'd have a benefits trifecta!
The catch-up provision is certainly helping higher income people much more than others, but people at a variety of income levels are taking advantage of the opportunity. We have a number of over 50 NHCEs saving between 50 and 75% of their income in their 401(k).
Mainly the highly compensated are making the catch up contributions. I only have two non-highly compensated employees out of 1500 employees that are making catch up contributions.
The only one in my company who is catching up is highly compensated. Lower wage workers can't afford to contribute any more than they are already.
All of our HCE's are well under 50. (h-m-m-m-m-m-m) So those of us running to catch up are the rank and file of the organization.
Definitely a benefit for highly compensated employees only. Less than 10% of catch up participants are not highly compensated.
Catch-up provisions are helping people over age 60 in all categories, both HCEs and non-HCEs, but income is definitely a factor. It is a great provision to have. Now, if the IRS would simply make ADP/ACP testing less of an issue, that would really be a move in the right direction
In most of the plans I administer, the catch-up contributions are normally used by the highly compensated employees. Most of the rank and file employees contribute 5 to 6% of compensation which doesn't even come close to qualifying them for the catch-up contributions.
In response to your question regarding who benefits the most from EGTRRA's catch-up provisions:
HCEs definitely benefit more and take advantage of the catch-up provisions more than NHCEs. However, more HCEs fit the over age 50 criteria than do NHCEs in most of the plans we administer.
The catch-up provisions are used only by the highly compensated in our plans. You know the saying...the rich get richer.
I have seen a variety of participants take advantage of the catch-up provisions. Generally it is HCEs as they are the participants with the means/income to be able to defer such a large amount of it into their 401(k). I do not think this is bad though as it gives the small business owners even more reason to have a 401(K) plan and in many cases encourages them to adopt safe harbor provisions which help the staff with more generous vesting and contributions than they would be getting otherwise.
Other groups (albeit small groups) of participants the catch-up helps is people who have retired from one company and working for a new employer and participants whose spouse has enough income for the family . They have other income sources and now can afford to defer 1/3 or more of their salary into their 401(k) account.
About 2% of our employees utilize the catch-up contributions. Funny, but all of the 2% are highly compensated...
I have more highly comp doing the catch up, but why wouldn't you. Our HCE's are restricted to 6% in our plan, whereas other participants can max at 25% or $15,000
I can't wait to see what answers you get for this one. I keep wondering if my experience is just a Florida thing. It seems like the catch-up provision is only a benefit for the high comps that don't have a well run plan. That is, one limited by poor deferrals and participation that limits his/her deferrals. Not necessarily the owners, but owners' top managers. So, even in these situations the users are not getting the full benefit.
The rank and file workers aren't putting in $5K much less and additional $5K per year. The owners have their brokers and businesses on the side to take excess cash for investing.
Do I sound jaded?
Although most employees are very pleased to know they can save more, only a very few actually participated in the catch-up portion of our 401(k) (only three in 2005 and of those, two didn't reach the max). All of the three who participated in the catch-up are considered highly comp'd.
No, Yes and Yes! We have one person who takes advantage of this and he happens to be a highly compensated employee. We approach affected employees, but they want their money now!
The majority of our catch-uppers are highly compensated. Interestingly enough, the non-highly compensated catch-uppers tend to be single participants. Most importantly, it's working well for ME.
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