Amendments added to, then cut from the Senate tax bill having to do with 401(k)s raise the question: Are catch-up contributions used only by wealthy savers? (Photo: Shutterstock)

Do the tax-deferred extra contributions 401(k) participants make after the age of 50 amount to a tax shelter for wealthy Americans?

The answer to that may depend on the definition of affluent.

The original draft of the Senate mark-up of the Tax Cuts and Jobs Act included a provision that would eliminate catch-up contributions for those making more than $500,000 a year.

Days after its release, Sen. Orin Hatch, R-UT, chair of the Senate Finance Committee, introduced an amendment that would eliminate all pre-tax catch-up contributions, and extend the existing limit of $6,000 in extra contributions for savers over 50 to $9,000.

Under the amendment, all catch-up contributions would be made on an after-tax, or Roth basis.

Of course, both provisions were cut from the amended mark-up now being considered by the Senate Finance Committee.

But they nonetheless raise the question of whether catch-up contributions are used only by wealthy savers.

Susan Jennings, General Counsel of National Life, a member of the Indexed Annuity Leadership Council, says her firm’s experience administering 403(b) plans for non-profit educational institutions shows catch-up contributions made by teachers counter the premise that extra contributions are only made by the wealthy.

“The Senate was trying to look at catch-up contributions as a way to tax more affluent savers, but it’s a misconception that people maxing out contributions are always wealthy,” said Ms. Jennings.

National Life does not break out specific numbers on the income levels of participants that do take advantage of catch-up deferrals. Ms. Jennings says most participants in National Life 403(b) plans can’t make the extra contributions until shortly before retirement.

“The proposed limits would affect a lot of people,” she said, citing a common example of teachers receiving a lump sum for unused sick leave at retirement. That money is often invested by teachers in their 403(b) plans on a pre-tax basis, explained Ms. Jennings.

“It’s common enough that it’s an everyday occurrence,” she added.

While all pre-tax contributions to traditional defined contribution plans have so far survived tax reform, the latest data from the Joint Committee on Taxation suggests the Senate version of tax reform is still susceptible to considerable changes.

Amendments that would repeal the Affordable Care Act’s individual mandate, and sunset tax cuts in 2025, negatively impacted the JCT’s distribution tables on how tax reform would impact the middle-class—and in big ways.

By 2027, all income brackets below $75,000 would see tax increases. Those making between $20,000 and $30,000 would see a 25 percent increase in taxes. Meantime, those making more than $1 million would see the largest decrease in their taxes.

Those numbers will be difficult to square in the court of public opinion. On Thursday, Democrats on the Senate Finance Committee spared no opportunity to note the imbalances in the amended version of the TCJA.

Whether catch-up contributions will reemerge as a pay for is anyone’s guess.

Here are six key data points on catch-up deferrals that help illuminate just who uses them, and whether they only benefit wealthy savers.

1. Average 401(k) balance of $456,100


As of the end of 2016, 11.5 percent of eligible participants in plans administered by Fidelity made catch-up contributions.

Their average account balance was $456,100.

As a representative from Fidelity noted, that’s a “pretty solid” account balance. But it doesn’t necessarily qualify a saver as affluent.

Fidelity recommends that workers aim to save 10 times their income at retirement. A pre-retiree earning $90,000 with a 401(k) balance of $456,100 would be a long way from that benchmark.

2. 12 percent of Vanguard participants


Nearly all plans administered by both Fidelity and Vanguard offer catch-up contributions.

In large plans administered by Vanguard, 12 percent of eligible participants took advantage of extra deferrals, according to the firm’s How America Saves study.


3. $250,000


Of eligible participants with more than $250,000 saved, 40 percent made catch-up contributions in large plans administered by Vanguard.

And 12 percent with balances between $100,000 and $250,000 made catch-up deferrals.

4. Lower wage earners rarely make catch-up contributions


About 40 percent of savers making more than $100,000 a year made catch-up contributions.

The number drops precipitously as income does. Only 2 percent of Vanguard participants making between $50,000 and $75,000 made catch-up contributions; and only 1 percent of those making between $30,000 and $50,000 were able to.


5. Using the catch-up to catch up


Some savers in their 50s and 60s who are significantly lagging in savings certainly do use catch-up contributions, according to Vanguard’s numbers.

Almost 10 percent with balances between $50,000 and $100,000 made catch-up contributions in 2016.

At age 55, Fidelity recommends savers aim to have accumulated seven times their income level.

6.  Participants in small businesses use catch-ups at higher rates


Vanguard participants in smaller plans, with less than $20 million in total assets, use catch-up contributions at higher rates.

In 2016, 17 percent of savers over age 50 maxed out contributions. They tended to have higher incomes, and “substantially higher” account balances, according to Vanguard.