Age 50 catch-up contribution is not anything new. In fact, it was first introduced by Congress almost two decades ago out of concern that baby boomers hadn’t been putting away enough for retirement. Such contributions are permitted in a 401(k), 403(b), government 457(b) plans, and IRAs, but the rules are different among plans. This article focuses on 401(k) and 403(b) plans.

The catch-up contribution rules are fairly straightforward; however, there are a few nuances that are important to know.

Who is eligible to make catch-up contributions?

A participant who is eligible to make catch-up contribution is referred to as “catch-up eligible participant.” A participant is catch-up eligible with respect to a plan year if he or she has met two conditions: (1) the age 50 requirement, and (2) is permitted to make elective deferrals under an employer’s plan. For 2020, the limitation on catch-up contributions to a 401(k) or 403(b) is $6,500, a $500 increase from the prior year. Under age 50? You don’t get the catch-up, but you do get the opportunity to put away up to $19,500.

So can catch-up contributions be made before a participant turns 50?

Yes. Wait, say that again? Correct, a participant can make catch-up contributions prior to him or her reaching age 50. In other words, a participant who is not age 50 until, say, Dec., 2020 can actually start making catch-up contributions months before in, say, Jan. 2020. The best way to explain this is probably by examples.

Example 1: Sansa will be age 50 on Dec. 14, 2020. The plan is a calendar year plan. Sansa contributes $19,500 (max for anyone under age 50) in the first six months from Jan. 1 through June 30, 2020. Sansa has 6 months from July 1 to Dec. 31, 2020 to make the additional $6,500 catch-up contribution. Here she starts her catch-up when she is about age 49-1/2.

Example 2: Let’s assume that Sansa’s employer’s pay period is bi-weekly, so a total 26 pay periods in a year. Sansa is really good about her finances and is fully aware of her becoming catch-up eligible. In the example above, Sansa could decide to spread her $19,500 plus the $6,500 catch-up starting Jan. 1, 2020. So, in this case $26,000 divided by 26 pay period gives Sansa a nice, round $1,000 deduction per pay period! Here she starts her catch-up when she is age 49.

Plan has to allow this contribution

Remember, the plan has to permit catch-up contributions — and today almost all plans do. The catch-up contribution can be either traditional pre-tax or Roth after-tax, or a combination of both. If you’re not sure whether or not your plan permits catch-up contributions, check with your trusted retirement plan expert.

Final words

Each year, you may want to send your employees age 50 and older a quick reminder that they are catch-up eligible. So when is it a good time to do so? When the IRS releases new annual contribution limits for the upcoming year which typically occurs in Nov. As a plan sponsor/employer, you are not obligated to provide such a reminder, but certainly a nice gesture. Look, as human beings, we don’t know what we don’t know. And even if we know, we are a creature that tend to be forgetful.

This is for educational purposes only. The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company’s benefits representative for rules specific to your plan.