Top of Mind


Why I Hate the 15-Year Catch-Up Election

Okay, perhaps hate is too strong word (and inappropriately timed, as Valentine’s Day is still fresh in our minds), but I will say that I most certainly do not like the 15-year catch-up election. Not one bit.

For the uninitiated, the 15-year catch-up election is a special election that a select few 403(b) participants at certain 403(b) plan sponsors (namely schools, hospitals, church-related organizations, and health and welfare service agencies, including home health service agencies) can utilize to exceed the 402(g) limit on elective deferrals, which currently stands at $18,000 for 2016 ($24,000 if age 50 or older by 12/31/16).

Why do I dislike the election so intensely? Let me count the ways:

  1. It’s complicatedDon’t believe me? Decide for yourself.

    It is the least of the following amounts:
    • $3,000
    • The excess of $15,000 more than the total elective deferrals made by the employee of the plan sponsor for prior years, or
    • The excess of $5,000 multiplied by the number of years of service the employee has with the plan sponsor or the total elective deferrals made for the employee at the plan sponsor for prior years.

    Confused yet? Even if you follow this formula, collecting the necessary data to complete the calculation can be an exercise in frustration. For example, if an employee has worked for you for 30 years, you will require 30 years of elective deferral data for that employee. Assuming that your payroll records don’t go back 30 years, you will need to rely on your recordkeeper for this data. In many cases, their records from so long ago are unreliable at best and nonexistent at the worst. And good luck if you utilize multiple recordkeepers, or utilized different recordkeepers over the 30-year period.

  2. IRS examiners LOVE the 15-year catch-upIf your plan is ever audited, you will make the examiner extremely happy if you inform him/her that your plan permits the use of the 15-year catch-up election. Examiners react with glee when they hear this news, since it means that they are virtually guaranteed to find plan defects related to the misuse of the 15-year catch-up election. In my experience with these calculations, the overall error rate exceeds 90 percent

  3. It is a useless election for the vast majority of people - The 15-year catch-up election is just that - an opportunity to catch up on missed deferrals. Most people who can afford to defer more than $18,000 do not qualify for the 15-year catch-up, since they have already deferred amounts in past year that are well over the $5,000 per-year threshold that would disqualify them from using the 15-year catch-up.

    For the few that might qualify, a quirk in the law often prohibits them from being able to use the special election as well. If an employee is eligible for the 15-year and age-50 catch-up elections, that individual will always be deemed to have used the 15-year catch-up election FIRST. So let’s say someone is lucky enough to qualify for both elections this year, but is only aware that they qualify for the age-50 catch-up (which is not uncommon). The person defers $24,000 this year ($18,000 + what they thought was the age-50 catch-up election of $6,000). In reality, the individual took advantage of BOTH elections; the first $3,000 of the $6,000 is deemed to be the 15-year catch-up, while the remaining $3,000 is considered to be the age-50 catch-up. Later on, when such a participant actually wishes to use the 15-year catch-up election, they will be surprised to discover that the election has already been used!

So that is why the 15-year catch-up election is not, shall we say, one of my favorite things. In short, I feel that plan sponsors should avoid it like the plague. However, I have learned that as a consultant, I need to be open-minded, so I am certainly receptive to any reason you may have for believing that the 15-year catch-up election is not as bad and I am making it out to be.

Do you LOVE the 15-year catch-up election, or at least like it a little? If so, feel free to share your reasons with me at info@cammackretirement.com. I would be delighted to eat some crow in a future edition of Top of Mind!


Michael A. Webb is a Vice President at Cammack Retirement Group. He resides in the woods of New Jersey (yes, you read this correctly) with his wife, son and the newest addition to the family, an orange cat.

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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