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

“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:

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.