Employee Benefits-IRS Offers Some Guidance On Catch-Up Contributions

In the Winter, 2010 edition of Retirement News For Employers, the Internal Revenue Service (the “IRS”) provided some helpful guidance on catch-up contributions made under employer-sponsored retirement plans. Here is some of what the IRS had to say:

–An employee who is eligible to make salary deferrals under a 401(k) plan, SIMPLE IRA, 403(b), SARSEP or governmental 457(b) plan may make catch-up contributions under that plan for any calendar year, up to the catch-up contribution limit for that year, if (1) the plan allows catch-up contributions, (2) the employee is age 50 or older at any time during the calendar year and (3) the employee makes a valid salary deferral election that includes the amount of the catch-up contributions before the end of the calendar year.

–Notwithstanding condition (1) above, if an employee can make salary deferrals under plans of unrelated employers, he or she can contribute up to the annual salary deferral limit plus the amount of the catch-up contribution limit even if none of the plans allow catch-up contributions. However, the employee can not exceed the annual salary deferral limit in any one plan. For example, an employee (aged 50) participates in both a 401(k) plan and a 403(b) plan of unrelated employers. Both plans allow employees to contribute the annual maximum salary deferral limit ($16,500 for both 2009 and 2010) but neither plan allows catch-up contributions ($5,500 limit for 2009 and 2010). The employee could elect to contribute a combined total of $22,000 ($16,500 plus $5,500 catch-up contributions) via salary deferrals to both plans. However, because neither plan allows catch-up contributions, the employee can not contribute more than $16,500 to either plan.

–An employee can make a catch-up contribution for a calendar year only from income that, but for the deferral election, he or she would have received during that year. Therefore, an employee cannot make catch-up contributions with 2010 wages for 2009.

–A plan may not treat salary deferrals as catch-up contributions until they exceed the least of the following: (1) any statutory limit, such as the annual limit on salary deferrals ($16,500 for non-SIMPLE plans, $11,500 for SIMPLE 401(k) and SIMPLE IRA plans), (2) the plan’s actual deferral percentage test limit, if applicable, or (3) the plan-imposed limit, if any.

–The maximum amount of catch-up contributions an employee can make for 2010 are: (1) $5,500 for 401(k) (not SIMPLE), 403(b), governmental 457(b) and SARSEP plans and (2) $2,500 for SIMPLE 401(k) and SIMPLE IRA plans.