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How 403(b) Catch-Up Contributions Work

August 9, 2022
6
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Participants in a 403(b) who are age 50 and over or who have more than 15 years of service may be able to go above the standard annual contribution limits set by the IRS.

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A 403(b) savings plan allows employees of qualifying non-profit organizations such as public school districts, charities, and churches to save money for retirement. It works a lot like a 401(k) plan, though there are important differences

The IRS sets limits on how much can be contributed to the plan each year. Like a 401(k), the 403(b) is designed to let workers over age 50 make additional catch-up contributions as they get closer to retirement age. Some 403(b) plans also permit an additional special catch-up provision for long-time employees.

403(b) primer 

In many ways, the 403(b) resembles employer-sponsored 401(k) plans, which are available to employees at private companies, and 457(k) plans, which may be offered to state and local government workers. Participants can make tax-advantaged contributions, which reduce taxable income during working years. The money in the plan can grow tax-free until withdrawals are made, usually after the employee retires. 

In a 403(b) plan, the employer takes some of the employee’s salary and puts it directly into the 403(b) retirement account on the worker’s behalf. This reduces the employee’s taxable income in the year the contributions are made because the contributions are tax deferred, meaning the contribution and any investment growth won’t be taxed until distributions are taken in retirement or when an employee makes an early withdrawal. Some employers add matching contributions, just like in a 401(k). The matching contributions are tax deferred as well.  

The IRS sets limits on how much in employee contributions, known as elective deferrals, and employer matching funds can be added to a 403(b) annually. These contribution limits will be adjusted for cost of living increases each tax year. For 2022, the annual limits are:

  • Elective deferral limit. The limit is $20,500. 
  • Overall limit. For combined elective deferrals plus employer matching contributions, the limit is the lesser of $61,000 or 100% of “includible compensation”—the amount of taxable wages and benefits earned in the most recent full year of service.  
  • Roth contributions. If the 403(b) plan has a Roth option, in which the employee makes after-tax contributions to the plan, any designated Roth contributions will be included in the overall limits.
  • Multiple 403(b) rules. If an employee participates in more than one 403(b) plan, all elective deferrals from all accounts must be combined and included within the overall limit. 
  • 403(b) and 401(k) rules. If an employee has both a 403(b) and a 401(k) plan, elective deferrals from both plans must be combined and included in the overall limit, too. 

However, the elective deferral limit can actually go higher than $20,500 thanks to extra catch-up contributions based on age and years of service.

403(b) catch up contributions

Younger employees often aren’t in a position to save as much for retirement as they would like. This could be due to lower, entry level salaries, as well as financial obligations such as saving for a house down payment, starting a family, and paying down debts. As employees enter their prime earning years, they might have more money available to save for retirement. 

The IRS recognizes the need for some older 403(b) plan participants to save extra as they near retirement. Catch-up contributions give these savers the opportunity to make up for lost ground.

An employer is not required to provide for catch-up contributions in its particular 403(b) plan. If it does include them, the catch-up contributions must be made available to all eligible participants who are making elective deferrals. 

In a 403(b) plan, there are two types of catch-up contributions that could be available to participants: age-based catch-ups and service-based catch-ups.

Age-based catch-up contributions

Employees who are over age 50 could make as much as $6,500 in extra 403(b) contributions. Effectively, this raises the annual employee contribution limit from the standard $20,500 to as much as $27,000. The 403(b) age-based catch-up works just like its cousin, the 401(k) catch-up.

The IRS has rules that govern how 403(b) contributions get counted as age-based catch-up contributions: 

  • Plan participants must make catch-up contributions to the 403(b) via elective deferrals. 
  • Elective deferrals won’t count as catch-up contributions until they have exceeded the standard limit of $20,500 for 2022, or until exceeding the plan’s specified limit (if it has one).
  • Catch-up contributions must be made before the end of the plan year. 
  • Employers who allow age-based catch-up contributions in their 403(b) plans must document it in writing. 

403(b) catch-up for employees with 15 years of service

Employees who are behind on their retirement savings goals (even if they are under age 50) might be able to take advantage of a special catch-up opportunity called the “lifetime catch-up contribution.” This type of catch-up is based on years of service. It’s known as the 15-year catch-up rule, which establishes an annual limit and a lifetime maximum amount that can be contributed. 

  • Qualifying conditions. To qualify, the employee must have a minimum of 15 years of service with the same employer. Determining the catch-up amount uses a complicated formula of the lesser of $3,000, or $15,000 over a lifetime, minus the sum of any prior 15-year catch-up contributions. 
  • Service-based contribution limits. Qualifying employees can then make extra contributions of as much as $3,000 per year for five years up to a max contribution of $15,000.

Note that not all 403(b) plans will include this special catch-up provision. Participants can check with their plan administrator to see if it does. 

403(b) coordination rule

Those who have a 403(b) plan that permits both age-based and years-of-service catch-ups are subject to the IRS’s 403(b) coordination rule, which dictates how to apply both types of contributions to the annual catch-up limit. 

  1. The service-based 403(b) catch-up contribution must be applied first. 
  2. Next, apply any extra age 50 catch-ups to the annual limit, as defined in Internal Revenue Code Section 414(v)

For example, if a participant is age 50 or over and makes $8,000 in catch-up contributions in 2022, the first $3,000 of that amount would be applied to the 403(b) catch-up limit. The remaining balance of $5,000 would go toward the age 50 catch-up limit. The participant could have contributed another $1,500 in catch-up contributions before hitting the over-age 50 annual limit of $6,500.  

The bottom line 

Participants in a 403(b) who are age 50 and over or who have more than 15 years of service may be able to go above the standard annual contribution limits set by the IRS. They do this through extra catch-up contributions that can add thousands of dollars to their retirement plan every year, but with limits. Employees can check with their 403(b) plan administrator to determine which catch-up contribution types are available.

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