What if a Plan’s Operating System Does Not Match Age-50 Catch-Up Contributions?

Q: Our 403(b) plan currently does not allow for the 15-year catch-up election but does permit age-50 catch-up contributions. We have an employer matching contribution, and our plan document specifically states that age-50 catch-up contributions are matched. However, I just discovered that our retirement plan operating system is programmed NOT to match catch-up contributions! Should I panic?

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

A: Probably not. Fortunately, unless your employer matching contribution is particularly generous, the operating system error would not likely result in an actual matching contribution error due to other factors that limit matching contributions.

For example, let’s say you match 100% of elective deferrals up to a maximum of 5% of compensation. For an employee eligible for the match and age-50 catch-up who deferred the full $30,000 in 2023 ($22,500 under the Internal Revenue Code’s general section 402(g) limit, plus $7,500 in catch-up) and had $100,000 in compensation, that employee’s match would have been $5,000 (5% of pay), regardless of whether the catch-up was matched or not, since only the first $5,000 of deferrals would have been matched.

But what if that employee had $500,000 in compensation in 2023? The initial thought might be that the failure to match catch-up deferrals might be an operational failure, since the 5% match would have equaled $25,000 (5% of $500,000), and only $22,500 of deferrals would have been matched due to the lack of catch-up match. Fortunately, another limit, known as the section 401(a)(17) compensation limit, comes into play here. Under 401(a)(17), matching contribution calculations are limited to $330,000 of compensation in 2023. Thus, the maximum possible match would have been 5% of $330,000, or $16,500.

Therefore, if you have a matching formula that is not too generous, you probably do not have an operational defect, though you should audit those who made age-50 catch-up contributions for 2023 (and prior years, as applicable) just to confirm that they did receive the full match. If not, there are correction programs available to address any operational errors, and you should discuss with retirement plan counsel well-versed in such matters on how to address this operational failure.

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.

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