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Catching Up on Catch-Up Contributions

There are lots of reasons why people get behind in their retirement savings — and one very helpful way that older workers can make up for lost time and catch up.

Individuals who are age 50 or over at the end of the calendar year can make annual catch-up contributions up to $6,000 in 2017 in a 401(k), and that’s above and beyond whatever other limits may apply. This was a provision in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), made permanent in the Pension Protection Act of 2006.

Still, Vanguard notes, in 2015 only about 16% of participants used this catch-up option when offered.

Here are six things you may not know about catch-up contributions.

1. A plan does not have to allow for catch-ups.

Plans are not required to offer the ability to make catch-up contributions. However, industry surveys indicated that more than 95% do and if yours doesn’t, you can change that.

2. You have to max out before you can catch up.

Elective deferrals are not treated as catch-up contributions until they exceed the deferral limit of $18,000 (in 2017) or the ADP test limit of section 401(k)(3) or the plan limit (if any).

3. You don’t have to include catch-up contributions in the non-discrimination tests.

Catch-up contributions are not considered when doing the ADP test and they are not considered in determining the amount of the minimum contribution required for a top-heavy plan.

4. Catch-up contributions can be accessed for loans and hardship withdrawals.

Catch-up contributions are treated the same as any other pre-tax contribution. For example, catch-up contributions would be treated as any other elective deferral when calculating available balances for loans.

5. HCEs can catch up even if their contributions are capped by non-discrimination tests.

Catch-up contributions are made on top of the current plan, statutory or regulatory limits. So, if an HCE is 50 or older, and the plan allows for catch-up contributions, the HCE should be able to contribute over the HCE limit without triggering a refund. Catch-up contributions must be made before the end of the plan year.

6. You don’t have to match the catch-up contributions.

However, industry surveys suggest that somewhere between one-third and half of the plans that offer catch-ups do.

Note: Employees with at least 15 years of service may be eligible to make additional contributions to a 403(b) plan in addition to the regular catch-up for participants who are age 50 or over. Read more here.