The Mysterious 15-Year Special Catch-up Contribution? What is this?

????????Most plan sponsors are aware of the age 50 catch-up contribution, but did you know there’s another special catch-up contribution that’s allowed??It’s called the 15-year catch-up contribution, or the 15-year rule, and is a special catch-up contribution that is allowed just for 403(b) plans.?That includes organizations in the nonprofit sector, healthcare, education, and churches.?This can be offered to participants, but the rules about who qualifies to make the contribution are very specific.?It is allowed by the IRS because your typical long-term employee in the nonprofit sector didn’t have the same access to a retirement plan earlier in their career as compared to employees in the corporate sector.?They felt they were put at a savings disadvantage and want to give those employees an extra opportunity to catch up on their retirement savings.?

To determine a participant’s eligibility for this special catch-up, plan sponsors need to ask a few questions such as:

1.?????How long have you worked for your current employer?

2.?????How much have you contributed to the 403(b) plan already?

The first question is important because a participant has to have worked for the same organization for at least 15 years to be eligible, hence the 15-year rule.?Once they’ve been employed for 15 years, they can be eligible to make this special catch-up contribution and possibly make it on an annual basis.?The second question is important because there are overall limits to the total amount that can be contributed as a special catch-up.?It can seem a bit ambiguous, but here are the IRS rules on this contribution.?The contribution must be the LESSER of the following:

1.?????$3,000;

2.?????$15,000 minus all prior year 15-year catch-up contributions;

3.?????$5,000 times total years of service, minus all elective deferrals made in prior years to any the organization’s qualified retirement plans.

If this IRS explanation confuses you at all, you’re definitely not alone.?I can sum it up a bit easier by telling you the lifetime limit for the 15-year special catch-up contribution is $15,000.?The goal is also to average out the participant’s total contributions made to their qualified retirement plans to $5,000 annually.?

As far as how this special catch-up applies to the overall contribution limits, a participant could technically max out all contributions for the year if they contributed first the full 402(g) limit of $20,500, then their maximum 15-year catch-up contribution, and then the maximum age 50 catch-up contribution.?That’s the order each contribution has to be considered when calculating a participant’s maximum contribution for the year with the 15-year rule taken into account.?

??????????????As you can see, it can be a little confusing and sometimes cumbersome to calculate an employee’s 15 or more year past with the employer to determine their eligibility for the 15-year special catch-up contribution.?But for those employer’s that have kept good employee records, it can be highly beneficial to the employees who are eligible.?As I mentioned in the beginning, this special catch-up was put in place to help those employees who have spent a majority or all of their careers in the nonprofit sector.?Many of these employees did not have the same access to a qualified retirement plan like their counterparts in the corporate sector.?As a plan sponsor, if you feel you could implement this special 15-year catch-up contribution, you can add the provision to your plan document if it isn’t elected already.?

??????????????Thanks for reading this week and as always, please feel free to reach out to me if I can be a resource on anything retirement plan related!

About Strategic Retirement Partners?

Strategic Retirement Partners is a nationwide independent retirement plan consulting services firm dedicated to providing guidance in decision-making and problem solving to employers and sponsors of retirement plans. With 23 offices from coast to coast, Strategic Retirement Partners currently consults on over 975 corporate and non-profit plans and over $16.8 billion in assets as of January 1, 2022.?

Securities offered through LPL Financial, Member FINRA/SIPC. For hyperlinks to FINRA and SIPC, please refer to ‘See Contact Info’ section in my Linked In profile. Investment advisory services are offered through Global Retirement Partners, an SEC Registered Investment Advisor. Global Retirement Partners and Strategic Retirement Partners (SRP) are separate entities from LPL Financial.