The New Super Catch-up for 401(k) and 403(b) Plans

…a Lot to Catch Up About

Effective January 1, 2025, plan sponsors can opt to add a plan provision to allow participants who are between the ages of 60 and 63 at the end of 2025 (and subsequent years) to contribute an additional catch-up contribution…a super catch-up. For 401(k) and 403(b) plans, the super catch-up contribution is 150% of the regular catch-up limitation in place for that year. For 2025, 150% of the $7,500 catch-up is $11,250. Adding a super catch-up provision is optional, but the option must be universally available, meaning that the increased limit must be available to all participants, including participants in all the plans of a related group.

For sponsors who choose to offer the additional catch-up opportunity, participant deferral limits for 2025 are as follows:

Monthly payroll contributions for a participant eligible for the super-catchup who is able to contribute the maximum would be designated as follows:

The above example demonstrates a basic premise – a deferral contribution CANNOT be a catch-up until the lowest of the following three limits have been exceeded:

• the maximum deferral of $23,500 allowed under Internal Revenue Code section 402(g), or
• a plan-imposed limit, or
• the maximum deferral allowed to highly-compensated employees (HCEs) by the Actual Deferral Percentage (ADP) test for the year

Deferrals that exceed the maximum allowed by the ADP test can be reclassified as catch-up contributions if the HCE is over 50 and has not already contributed a catch-up. Alternatively, excess contributions can be returned to the HCE, among other alternatives beyond the scope of this article.

Timing Matters: the Mechanics Should Follow the Rules

The timing of the classification as a catch-up contribution matters because catch-up contributions are not subject to discrimination testing, such as the ADP test, and to other maximum limits, such as the 402(g) limit, and the maximum annual additions limit under Internal Revenue Code section 415. Additionally, some plans do not allocate employer match contributions to the catch-up.

For all the above reasons, it is not appropriate to designate any portion of a participant’s employee deferral as a catch-up until the maximum deferral limit (described above) has been satisfied FIRST.

After-the-Fact Fix

Some payroll companies encourage plan sponsors to split each employee deferral contribution withheld from every payroll between deferral and catch-up, starting in January, with the very first payroll of the year. This practice is conceptually incorrect, since no limit has been exceeded in January, unless a participant contributes the entire 402(g) limit ($23,500 in 2025) from his/her first paycheck. For a participant who has elected to contribute the maximum, allocating part of each contribution to catch-up will work, if the participant remains employed for the full year. However, for any participant who has had part of the employee contribution classified as a catch-up starting in January, the amount allocated to the catch-up source will be incorrect if the participant separates from employment or stops contributing mid-year. Specifically, the census information submitted to the third party administrator to conduct the ADP test will not reflect enough of the deferral that is subject to discrimination testing and other limits, unless the plan sponsor reclassifies the catch-up contributions as regular deferral contribution up to the maximum $23,500 for 2025. Additionally, the plan sponsor should also consider reclassifying the source codes in the participant account balance at the recordkeeper. This concept is best explained through an example.

Example – Coding Participant Elections on the Payroll Software

When the payroll software has two separate codes for regular deferrals and for catch-up contributions, some employers allocate the deferral withholdings for each payroll period partially to the regular deferral source and partially to the catch-up code. Assuming monthly pay periods, for a participant who contributes the maximum deferral and catch-up, a pro-rata allocation of each monthly contribution to deferral and catch-up through the end of the year would result in the correct 402(g) maximum for 2025 of $23,500 plus a $7,500 catchup, as follows:

As illustrated, if the participant stays employed all year, there is no effect on the classification of total contributions between regular deferrals and catch-up at the end of the year. The 402(g) maximum of $23,500 and the maximum catch-up contributions of $7,500, and $3,750, as applicable, will have all been achieved by the end of the year. There is no impact on the data submitted for discrimination testing, and if the plan sponsor does not match the catch-up, the participant will have received the full match specified by the plan’s allocation formula.

But There’s a Catch if the Participant Terminates Mid-Year

On the other hand, if the participant had left the company or started contributing mid-year, the participant’s account would show a catch-up contribution at the end of the year, even though the deferral limit had not been reached, as follows:

What’s the Catch?

Catch-up contributions are not subject to discrimination testing. If the erroneously categorized catch-up contributions above are not included in the ADP test as regular deferral contributions, the test will be performed with faulty data. Whether the above participant is a non-highly compensated or a highly compensated individual, the misclassification of regular deferrals as catch-up contributions affects the results of the discrimination testing. If the ADP test passes with ample margin, or the plan is a safe harbor plan, this contribution classification error may not have much impact, but if the test fails, it means that using correct data would have caused the test to fail by a different amount, or potentially, to pass, if the additional deferrals were contributed by a NHCE. Additionally, if the plan does not match catch-up contributions, the plan sponsor may need to allocate an additional match contribution corresponding to the deferrals misclassified as catch-up contributions. That’s the catch!

There is No Rush!

Participants between age 60 and 63 whose employers opt to offer the additional catch-up can elect to contribute the maximum $23,500 + $11,250= $34,750, or $2,895.33 per month, or $668.27 weekly, but if the employer codes the payroll software so that the mechanics follow the law, no part of the employee deferral will be considered a catchup until August. It means that there is time to get it right.

In fact, all employers need is to understand and follow the guiding principle that states that catch-up contributions are participant deferrals that exceed the lesser of: (1) the plan-imposed limit; (2) the 402(g) limit, as indexed – $23,500 for 2025; (3) the deferral permitted to HCEs by the ADP test. For employers who follow this basic concept, there is no catch.