(b)lines Ask the Experts – Should the 15-Year Catch Up Be Eliminated?

“Do the experts have any thoughts on the 15-year catch-up election?

“Do you think it is a desirable plan provision? If not, can it be eliminated? What are the potential issues/impacts of elimination?” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:

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Thank you for your question! The 15-year catch-up election continues to be hot topic among eligible plan sponsors, and the issue has not been addressed in the Ask the Experts column format in several years. Thus, a refresher is certainly in order!

In an article for PLANSPONOR back in 2012 (see “15 Year Catch-up: The Dinosaur of 403(b) Plans?”), one of the Experts  detailed the difficulties with the 15-year catch-up election—all of which are still valid today:

1)         Complexity—the election is among the most difficult to calculate in the defined contribution arena, requiring contribution data for the entire working career of an individual employee. The complexity has been exacerbated in recent years with the addition of the age-50 catch-up election under Code Section 414(v), which creates confusion over which election is actually being utilized as this Ask the Experts column from 2011 illustrates;

2)         Audit risk—15-year catch-up calculations are one of the primary issues identified in IRS audits, and lack of compliance appears to be widespread; and

3)         Applicability—legitimate utilization of the election is often low, as most of the participants who can afford to contribute in excess of the standard 402(g) elective deferral limit do not qualify for the election since their lifetime contributions would exceed the maximum threshold for use of such an election.

The trend identified in the 2012 PLANSPONSOR article has only accelerated since that time; more and more plan sponsors who previously permitted the 15-year catch-up election have simply decided to eliminate it (to address your question above regarding elimination, the 15-year catch-up is indeed an elective, and not a mandatory, plan provision, so it may be eliminated via plan amendment). 

Of course, there can be a potential employee relations issue here, the scope of which is dependent on the number of individuals actually utilizing the election. By definition, that figure should be low (some plan sponsors have discovered upon review that not a single individual was utilizing the election!), which minimizes employee impact. If the number of individuals is high, you may wish to conduct a review of the elections to ascertain the accuracy of the calculations.

After that analysis, the plan sponsor may choose to eliminate the election prospectively (e.g. existing individuals who are utilizing the election  may continue to do so until their elections are exhausted, but no new 15-year catch-up elections may be made) or eliminate the election entirely. The former approach may serve as “soft landing” for affected participants, especially if a significant number of individuals are utilizing the elections. Other than this employee relations issue, all other impacts of the removal of the 15-year catch-up election should be positive as implied above.

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.

Americans’ Optimism Doesn’t Match Retirement Readiness

While 81% of respondents to a survey feel optimistic about their financial futures, only one in five feel “very prepared” for retirement.

Lincoln Financial Group’s latest Measuring Optimism, Outlook and Direction (M.O.O.D.) of America Survey shows the majority of people polled (81%) feel optimistic about their financial future.

However, these positive attitudes are not translating into action-oriented behaviors. The data shows that only one in five Americans feels “very prepared” for retirement, protecting their wealth and handling income disruptions of varying durations. The top barriers to preparing for the future include a sense of feeling overwhelmed by the options for insurance coverage (70%) and retirement planning (67%), as well as the need to prioritize short-term expenses (65%).

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When it comes to getting educated about those products and options, just 37% of Americans use advisers as a source of financial advice, compared with 30% each who turn to online research and spouses/significant others.

According to the study, 69% of Americans identified themselves as being “In control,” a mindset that reflects how comfortable respondents feel about their overall life, personal/family health and financial future. This number is up slightly from 2011 (66%), the first year the study was conducted.

NEXT: Difference between “In control” and not.

In control Americans continue to feel more optimistic, empowered and prepared than those who don’t identify themselves that way. Of those Americans who are in control, 94% feel optimistic about their financial future versus 53% of their counterparts. Specifically, they are more likely to own a variety of financial products in the insurance, annuity and retirement categories, as well as prioritize a number of actions to help create a more secure financial future.

Notable financial priorities of “in control” Americans include:

  • Being debt-free (70%);
  • Making sure they have access to health care plans for themselves and their families (69%);
  • Protecting their wealth, assets or savings (66%);
  • Paying their credit card bill(s) in full each month (64%); and
  • Putting money away for retirement (62%).

Results for the 2015 M.O.O.D. of America poll are based on a national survey conducted by Whitman Insight Strategies (WINS) on behalf of Lincoln Financial Group from March 31 to April 9, 2015, among 2,273 adults 18 years of age and older across the United States.

More information can be found here. The recently released Special Report: M.O.O.D. of America on Employee Benefits study is a companion piece that more closely examines non-medical workplace benefits and the ability of these products to heighten a worker’s confidence in their financial future.

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