Could the 15-Year Catch-Up Election Enable a Pre-Tax Catch-Up Deferral Under SECURE 2.0?

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

Q: Our 403(b) plan eliminated the 15-year catch-up election several years ago due to the administrative complexity of the election and the fact that only a handful of people were using it. However, given the SECURE 2.0 Act of 2022 restriction forcing age-based catch-up elections to be Roth beginning in 2024 for those with prioryear wages exceeding $145,000, I thought that there may be some value in bringing back the 15-year catch-up election so that affected employees could make a catch-up election that is not restricted to Roth deferrals. What say the Experts?

Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Interesting issue! The 15-year catch-up election is an election unique to 403(b) plans where, via a complicated calculation, individuals who have completed at least 15 years of service with a qualified organization MAY be able to contribute an additional amount greater than the applicable Internal Revenue Code Section 402(g) limit to make up for relatively smaller contributions made in prior years. This additional special catch-up cannot exceed $3,000 per year and is capped at a lifetime limit of $15,000. The 15-year catch-up is also subject to an ordering rule whereby any deferral in excess of the Section 402(g) limit is attributed to the 15-year catch-up first, then the age-50 catch-up, if an individual is eligible for both elections. Thus, we can see your thinking that the 15-year catch-up election may have some value in a scenario where someone is otherwise unable to make a traditional pre-tax catch-up deferral.

However, we have yet to see any regulations regarding the new mandated Roth catch-up and how it interacts with other catch-up elections. If the current ordering rule remains unchanged, the administrative complexity of the current 15-year catch-up election, combined with the fact that people earning more than $145,000 are unlikely to be eligible for the 15-year catch-up, would leave the Experts to believe that, in many scenarios, bringing the catch-up election back for this purpose might not be an efficient solution to the problem of mandated Roth catch-up.

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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.

More Annuities Could Be Permitted as 401(k) Default if New Bill Passes

Current liquidity rules make it difficult to use an annuity as a QDIA, but new legislation would make it easier to use certain annuities as QDIAs.

Representatives Donald Norcross, D-New Jersey, and Tim Walberg, R-Michigan, re-introduced the Lifetime Income for Employees Act, a bill which would make it easier for annuities to be used as the default investment in 401(k) plans, on Friday.

In order to use an annuity as a default investment option, a plan sponsor must provide to participants notices regarding the nature of the annuity and give them 180 days to divest from the annuity without penalty, according to the bill re-introduced in the House on Friday.

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Further, if a participant is defaulted into the annuity, no more than 50% of their contributions can be put into it. This is to ensure participants’ savings are invested in a diversified portfolio, including other funds that will tend to be more liquid.

Norcross and Walberg proposed a similar bill in 2020 and reintroduced it again in 2022 to widespread industry support, but the legislation did not make it out of committee.

Norcross’ office provided an emailed statement: “To ensure that QDIAs continue to contain a mix of asset classes, which Congress required in 2006, the bill would provide that no more than 50 percent of the investment could be allocated to the annuity fixed income component. For younger employees the annuity would likely be much less than 50 percent.  The remaining mix of assets would continue to consist of mutual funds, collective trusts, or other securities or pooled funds. Ultimately, the law would rely upon the fiduciary obligation of the plan administrator (employer) to make a prudent selection on what product to default an employee into based upon age and other factors.”

The Insured Retirement Institute endorsed the legislation in an emailed statement and expressed regret that the Department of Labor has not updated its regulations to “reflect innovation in retirement security products.” Specifically, the DOL requires a QDIA to be liquid enough that funds can be withdrawn at least once every three months.

The IRI noted that the bill “would allow retirement plan sponsors to use lifetime income solutions that have delayed liquidity features and thus can provide better returns as qualified default investment alternatives (QDIA) for a portion of contributions made by participants who have not made investment selections.”

The Teachers’ Insurance and Annuity Association of America, which has long provided retirement income options in not-for-profit 403(b) plans and has more recently started offering them in private plans, also endorsed the legislation. Chris Spence, head of federal government relations at TIAA, clarified that, currently, “annuities are fully allowed in QDIAs and are fully allowed in 401(k) plans.” The legislation “would simply provide some relief from the requirement that all QDIA assets be available for withdrawal ‘not less frequently than once within any three-month period.’”

The bill has been referred to the House Committee on Education and the Workforce, the same committee to which it was referred in February 2022 and in which it ultimately languished.

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