401k Catch Up Contributions

What are catch- up contributions to a 401k? Can my employees make such contributions to the small business 401k I offer? Katie D. Harris, Beaverton, OR 97005, manages a home furnishing outfit.

Catch up contributions are a means by which you or your employees can make up for starting your retirement planning late in life. Those people who failed to set aside some portion of their earnings through the early years of their career get a second chance for future financial security through catch up contributions. Employees above the age of 50 can make their catch up contributions into their 401k account. TheIRSallows them to make an ‘extra’ contribution over and above the maximum allowed by law for other participants.

What you should know as employer is that the ‘extra’ allowed by theIRSis dependent on the plan’s features and conditions. For example, a Simple 401k allows a much smaller ‘extra’ contribution than a traditional one does. Also, theIRS’s allowance for the extra contribution depends on whether or not your plan assumes additional contribution limits from your employees.

TheIRSmay change its own allowance for the extra contribution subject to fluctuations in the inflation index. If inflation rates are going through the roof then above 50 participants may be allowed to contribute a bigger sum in addition to the regular contributions.

One critical aspect for you to remember is that your employees can make catch up contributions to their account only if you have made provisions for this in your plan. The law does not require you to allow such contributions. This is a provision you make at your discretion if many of your employees request you to do so.

Adding this provision can show your employees that you prioritize their best interests. This will lead to better loyalty and improved employee morale in your business. Use a DIY package like http://401k-easy-online.com/ to make keeping track of various employee contributions easy. This package will help you manage the 401k funds and keep records updated with just a few minutes of work each month.

About Elliot Earl, Director, Pension Trade Association
Director, Pension Trade Association Founded in 1982, the Pension Trade Association [California Domestic Nonprofit Corporation #C1629080] is dedicated to helping workers save for their retirement through expanded coverage of 401k -type defined contribution pension plans.

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