By Neil A. Ringquist, C.P.A., J.D., Senior Writer Analyst, CCH FEDERAL TAX GUIDE and CCH U.S. MASTER TAX GUIDE; Contributing Author, CCH Focus.
tarting for tax years beginning after December 31, 2001, individuals who are at least 50 years of age will be permitted to contribute additional amounts (“catch-up contributions”) to a variety of pension and retirements plans. Eligible plans include traditional IRAs, Roth IRAs, 401(k)s, salary reduction simplified employee pension plans (SEP), savings incentive match plans for employees (SIMPLE), 403(b) plans and 457 plans. These catch-up contributions will be in addition to the amounts that such individuals will otherwise be permitted to contribute.
While Congress established a uniform age requirement for catch-up contributions (i.e., at least age 50), it decided, in its wisdom, to gear the maximum allowable catch-up contribution to the type of retirement plan in which the individual participates (e.g., for 2002, $500 to an IRA and $1,000 to a 401(k)).
The motivation behind permitting catch-up contributions is based upon the belief that older employees who may have more disposable income should be permitted to “catch-up” on the elective retirement plan contributions that they could not afford to make when they were younger. It is worth noting that the legal authority for permitting catch-up contributions is nothing new, and employees that participate in 403(b) or 457 plans have had this privilege for a number of years. However, these traditional catch-up contributions to 403(b) and 457 plans are not based upon the employee’s age.
IRAs. With regard to IRAs, the Code now requires that a valid trust instrument provide that annual contributions may be made up to the maximum amount established by the Code for a particular year (Code Sec. 408(a)(1), as amended by the Economic Growth and Tax Relief Reconciliation Act of 2001). This new language replaces the “$2,000 maximum” that existed prior to amendment and apparently will give the trust the flexibility to accept both regular and catch-up contributions.
Age. With regard to an individual’s age, catch-up contributions may be made to an IRA if the individual “has attained the age of 50 before the close of the taxable year” (Code Sec. 219(b)(5)(B), as added by the Economic Growth and Tax Relief Reconciliation Act of 2001). With regard to employer plans, the wording is a bit different in that an individual eligible to make catch-up contributions is defined as one who has “attained the age of 50 before the close of the plan year” (Code Sec. 414(v)(5)(A), as added by the Economic Growth and Tax Relief Reconciliation Act of 2001). In most situations, the plan year is the same as the calendar year.
SIMPLE Plans. For SIMPLE 401(k) plans and SIMPLE IRAs, the maximum catch-up contribution for 2002 will be $500 (Code Sec. 414(v)(2)(B)(ii), as added by the Economic Growth and Tax Relief Reconciliation Act of 2001). This maximum will increase by $500 per year (e.g., $1,000 for 2003) until it reaches $2,500 in 2006. After 2006, the maximum of $2,500 is subject to an inflation adjustment.
401(k), 403(b) and 457 Plans. As a general rule, starting in 2002, employees age 50 or over will be able to add a maximum catch-up contribution of $1,000 to their 401(k), 403(b) or 457 plan (Code Sec. 414(v)(2)(B), as added by the Economic Growth and Tax Relief Reconciliation Act of 2001). This maximum amount will increase by $1,000 per year (e.g., $2,000 in 2003) until a maximum of $5,000 is reached in 2006. After 2006, the maximum of $5,000 is subject to an inflation adjustment.
The Conference Committee Report to the Act states that an employer is permitted to make matching contributions with respect to catch-up contributions. Because the catch-up provision will take effect in a bit more than six months, it is likely that the IRS will issue more detailed procedural information before the end of summer.
[CCH FEDERAL TAX
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For CCH’s extensive coverage of 2001 tax legislation, visit http://tax.cch.com/onlinestore. New titles for professionals and their clients include Tax Legislation 2001: Law, Explanation and Analysis; Estate Planning Strategies After Estate Tax Reform: Insights and Analysis; and Estate Planning Under the New Law: What You Need to Know.]