The Senate tax proposal released Thursday would restrict employees earning at least $500,000 from making so-called “catch-up” contributions to 401(k) workplace retirement plans.
Almost all employers offering 401(k) plans allow eligible workers age 50 and over to make the additional contribution, which is $6,000 for 2017, on top of the standard $18,000 cap. Thirty-five percent of workers with salaries of $100,000 or above took advantage of the option in 2016, according to a survey of large employers by benefits administrator Alight Solutions.
The appeal of the contributions to high-income workers is less the tax deduction and more the deferral of that money into a Roth 401(k), where earnings on the money, which is contributed on an after-tax basis, can compound and be withdrawn in retirement without having to pay tax, said Greg Rosica, a tax partner at Ernst & Young.
In 2016, 9.4 percent of eligible workers across all income bands used the catch-up feature, with an average contribution of $4,978 out of the total $6,000 catch-up amount allowed, according to the Alight Solutions survey. In 2015, 13.7 percent of such workers made extra contributions, with an average of $3,745.
“Catch-up contributions are a valuable tool that allows older workers to add to savings for retirement,” said Robyn Credico, senior retirement consultant at Willis Towers Watson.