What You Need to Know About 401(k) Catch Up Contributions

By Barry Solomon , last updated October 10, 2011

The Internal Revenue Service allows you to contribute a maximum of $16,500 of your 401 (k) annually up to the age of 50, after which you are allowed to make an additional catch up contribution of $5,500 per year. The name is appropriate because it is designed to allow those 50 years or older to catch up with their needs prior to actual retirement. For the 2012 calendar year that amount may be increased to account for any inflation. These amounts are made with tax-deferred dollars. Employers are not required to make catch up contributions allowable, however, if they do, then that must apply to all participants in the plan. These catch up limits apply to traditional or safe harbor 410 (k) plans. If you participate in a Simple 401 (k) plan then the catch up limit is just $2,500 per year. In no case, however, may your catch up contribution exceed the amount of your compensation over the elective deferrals that are not catch up contributions. If you are participating in plans from multiple employers, you may defer the full amount of the catch up contribution even if none of the plans allow you to make catch up contributions. Keep in mind though, that ninety eight per cent of all 401 (k) plans do offer the right for any qualified participant to make catch up contributions. If your plan currently does not offer catch up contributions, it would have to be amended to accept them. The catch up contribution will be made as a payroll deduction once you inform your plan administrator that you want to take it. However, your employer will not have to match the contribution, even if it is matching your regular contributions.

The catch up contribution will be reported on the same W-2 Form as your regular contribution so no new form will have to be issued. You must reach your plan's annual contribution limit before you are eligible to make a catch up contribution. Thus you would defer $16,500 plus $5,500 for a total combined contribution of $22,000. It is up to you to make sure that the combined catch up contributions do not exceed the limits. It is a good idea to maintain contact with your plan administrators to properly execute the various deferrals. Catch up contributions are treated the same as regular contributions when it comes to hardship early withdrawals.

If you have exceeded the deferral limit, you may notify a plan before April 15th of the year following the tax year to return the excess contributions prior to April 15th of the subsequent tax year. It will be included in your gross income for the previous tax year and will not be considered an early withdrawal and therefore will not be subject to the 10% early withdrawal tax penalty. If, on the other hand, you leave the deferral in the plan, then it is taxed twice, once when contributed and a second time when it is withdrawn. These corrective distributions are reported on Form 1099-R. So it is important to monitor your contributions to your 401 (k) plans to make sure that they do not exceed the appropriate limits.

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