403(b) Plans: What is this 15 Year Special Catch-Up Contribution All About?

If you’re a participant in, or a plan sponsor of, a 403(b) plan, you may have heard about the “15 Years of Service” (15YOS) special catch-up contribution. This is a unique deferral option, available only for 403(b) participants. Sorry, 401k brethren, you don’t get this opportunity. But how does it work, especially since many of these 15+YOS employees are 50+ years old and can also get that “age related” catch-up (currently at $5,500).

Let’s Take a Closer Look

Well, how it works leaves a lot of heads scratching and perhaps leads to more questions. Unfortunately, not a lot of the questions surrounding this provision have a direct answer though. So it’s probably best to start with the actual formula for determining the special contribution and go from there. On an annual basis, the 15+YOS “special catch-up contribution” is the littlest of the following 3 items:

1. $3,000
2. $15,000 less any previously used Special Catch-Up contributions
3. ($5,000 x #years of service) minus your total elective deferrals in the plan as of the prior year-end.

Many folks misunderstand this rule and interpret it as a flat $3,000 available from year to year. Let’s look at a few examples so we can better understand this opportunity.

Example #1

Dr. Jones, age 42, has been with XYZ hospital for 18 years and has not deferred much in prior years. In fact, he has only deferred $20,000 since his date of hire and has not utilized the special catch-up at all since it has been available to him. Dr. Jones decides he wants to contribute the maximum allowable amount in the next year. Understanding the normal annual 403(b) contribution limit is $17,500, here is a question. How much can he defer? Ans: $20,500. Did you get it? Let’s look at the solution below to see how we came up with this.

Solution #1

Item #1 above is $3,000 (Hint, it’s always $3,000). Item #2 is $15,000($15,000 – $0). Item #3 is $70,000 ($5,000 x 18yos – $20,000). The lesser of these is item #1, so…. $17,500 plus $3,000 = $20,500.

Piece of cake, right? So, at the risk of sounding like an Abbott and Costello routine, let’s skip ahead 5 years for example #2.

Example #2

Dr. Jones is now 47 (23 years of service) and has utilized $14,000 worth of special catch-up contributions and his total contributions from date of hire are now $102,000. Again, $17,500 is the normal limit. How much can he defer in the next plan year? Ans: $18,500. What? How?

Solution #2

Item #1 is $3,000 (You didn’t get this wrong, did you?). Item #2 is $1,000($15,000-$14,000). Item #3 is $13,000($5,000 x 23yos – $102,000). The lesser of these is Item #2, so $17,500 + $1,000 = $18,500. 

Right about now, Costello is yelling “Hey Abbott”! For a final example, let’s skip ahead another 5 years……

Example #3

Dr. Jones is now 52 (28 years of service) and let’s assume he has utilized only $10,000 worth of Special Catch-Up contributions, but he’s actually done a better job of contributing over all years. His total contributions as of the prior plan year are at $138,500 and the regular contribution limit is again at $17,500. What does he max out at for the next plan year? Ans: $24,500. Huh?

Solution #3

Item #1 is…$3,000 (I’m not gonna push on this anymore, just sayin’). Item #2 is $5,000 ($15,000-$10,000). Item #3 is $1,500 ($5,000 x 28 – $138,500). The lesser of these is item #3 so the special catch-up is $1,500 – but don’t forget that Dr. Jones is now over 50 and eligible for that age 50+ catch-up of $5,500. So, $17,500 + $1,500(15yr) + $5,500(Age 50+Catch-Up)  = $24,500.

The order of how I’ve placed the items in solution #3 is very important for the 50+ crowd with 15+ years of service. That is because the 15YOS special catch-up applies before the age 50+ catch-up. So any deferral over the IRS contribution limit for folks who fit into both of these categories gets applied to the 15YOS max ($3,000 per year/$15,000 Total)  first – then to the age 50+ catch-up.

If you’re looking at utilizing the 15YOS special catch-up contribution, you may want to check with your plan’s advisor and/or record-keeper. In many instances, a 50+year old participant may have already used up the maximum 15k available under the 15YOS rule, thinking they were just using the 50+ catch-up. And you certainly don’t want to get into a situation of having to return contributions to your long term employee, who is more than likely a key member of your organization!