Setrics Tracker
Retirement

Catch-Up Contributions and Handling Excess Contributions

In preparation for retirement, it is important to be aware of a few key facts regarding contributions.  This allows you to maximize your annual limit and avoid over contributing to your 403(b) and/or 457(b) plan.

How much can I contribute?

Each year the IRS evaluates the annual limits to determine if they should be increased (by $500 increments) based on cost of living.  In 2017, the annual contribution limit is $18,000 and is increasing to $18,500 in 2018.  Please note, that contributions to a 403(b), 403(b) Roth and/or 401(k) plans are combined for the same annual limit; however, contributions to a 457(b) are separate.  It is necessary to confirm the limit each year.

There are 3 types of catch-up contributions which allow employees to increase their annual limit each year.  The first catch-up is purely based on age; therefore, the only verification is your date of birth to confirm your eligibility.

  • The “age 50+” catch-up provision allows an employee to increase their eligible contribution limit by an additional $6,000. To qualify, you must attain age 50 by December 31st of the year in which you plan to utilize this catch-up.  Based on the 2017 annual limit, this increases the eligible amount to $24,000.  This catch-up can be applied to both the 403(b) & 457(b) plans, allowing an additional $12,000 just based off age.

The following two special catch-up contributions have specific requirements for a participant to be eligible.  These were created to allow employees to make up for missed contribution opportunities in prior years.  Please check with your payroll or benefits department to confirm if the plan allows these special catch-ups.  Once you have confirmed either or both catch-up is allowed, request a Maximum Allowable Contribution Worksheet (often referred to as a MAC) from your payroll or benefits office.  This worksheet is required to confirm if you are eligible to utilize the catch-up and calculates the amount you may contribute over and above the annual limit.  The calculations factor in your prior years contributions which determine the amount of the catch-up you can utilize, so have this information available.  This can be obtained from prior year W-2’s.

  • The “15 years-of-service” catch-up is specific to the 403(b) plan.
    • The employee must have 15 consecutive years of service with the same employer.
    • Eligible employers for this catch-up include schools, hospitals, and churches.
    • Limited to $3,000 each year for a maximum of 5 years.
  • The “final 3 years prior to retirement” catch-up contribution allows an employee to contribute up to 200% of the annual limit which is currently $18,000. This means in 2017, an eligible participant may put up to $36,000 into a 457(b)! This provision is only available in the 3 years ending before the year in which the employee reaches “normal retirement age”.  This may not be used in the same year you intend to retire.  This catch-up limit is only available if the employee did not fully fund their 457 accounts in previous years that the plan was available. 

What if I contributed more than I was eligible for?

Don’t panic!  First, determine the amount you have over contributed to your retirement plan. This amount can be found by subtracting the amount on your most recent pay stub from your annual limit. Second, contact your payroll and/or benefits office to determine the best route to correct the excess amount.  It is important to correct the over contribution before April 15 of the following plan year to avoid any tax penalties.  There are two options to correct an over contribution:

  • Complete a distribution request indicating the distributable event is a correction of excess contributions. The vendor will distribute the amount in excess and a 1099-R (for tax reporting purposes) will be issued in January of the year following the distribution.  This option is ideal if the correction is completed the following tax year to avoid the payroll office having to issue a corrected W2.
  • The funds can be recalled from the vendor by the plan to be returned to the participant via payroll to ensure the taxes are deducted. By having the funds returned via payroll the W2 is correct; therefore, a 1099-R is not required.  This is ideally accomplished in the same tax year in which the contributions were made.

By keeping these guidelines in mind, an employee can avoid over contributing while maximizing their contributions.

Subscribe to the NBS Knowledge Base

Subscribe to be notified when new articles are posted.