Benefit professionals continue to navigate a regulatory environment made more complicated by SECURE 2.0, and one area ripe for confusion is the rules governing age‑based contribution limits and excess deferrals. While excess deferrals can arise in many situations, the new age‑60–63 “special catch‑up” rule provides an excellent illustration of how easily an honest mistake can trigger significant corrective obligations and adverse tax consequences.
Beginning in 2025, SECURE 2.0 created a higher catch‑up contribution limit for individuals who are ages 60 through 63 on December 31 of the year in which the contributions are made. For both 2025 and 2026, the higher catch-up limit for these individuals is $11,250. Although this sounds straightforward, the rule can be surprisingly counterintuitive. A participant qualifies only if they are 60, 61, 62, or 63 on December 31 of that specific calendar year. If a participant turns 64 at any point during the year, they are no longer eligible, even if they made their catch‑up contributions while they were still 63. This creates unusual situations where a participant may believe they qualify when, in fact, they do not. For example, an individual who turns 64 in July 2025 might contribute earlier in the year thinking they qualify for the special catch‑up, but because they are 64 on December 31, they are entirely ineligible.
When this misunderstanding occurs, the result is an excess deferral. In 2025, a participant who is not eligible for the special age‑60–63 catch‑up may contribute up to the standard $23,500 employee deferral limit plus the regular $7,500 age‑50+ catch‑up amount ($31,000 in total). Any amount contributed above $31,000 by a participant who turns 64 in 2025 must be treated as an excess deferral. Once an excess deferral exists, the Internal Revenue Code requires that the excess amount, along with all earnings attributable to that excess through December 31, be distributed to the participant no later than April 15 of the following year, which aligns with the participant’s individual tax return deadline.
Meeting this April 15 deadline is critical because it determines how the excess will be taxed. When the excess amount and related earnings are distributed in a timely manner, the participant pays tax on the excess deferral in the year it was contributed, and only the earnings are taxable in the year of distribution. The plan or recordkeeper issues a Form 1099‑R reflecting the correction, aligning the tax treatment accordingly. This is generally straightforward and avoids harsher consequences.
However, when the corrective distribution is made after April 15, the tax implications become significantly more punitive. The IRS applies a double‑taxation rule: the excess deferral is taxable in the year it was contributed and again in the year it is ultimately distributed. The participant effectively pays income tax twice on the same dollars. In addition, while the earnings are still taxed only in the year of distribution, the plan cannot fix the situation by amending W‑2s, recharacterizing contributions, or using IRS correction programs. The Employee Plans Compliance Resolution System (EPCRS) does not allow for late correction of excess deferrals. The recordkeeper will still issue a Form 1099‑R for the year of distribution, but the participant is left with the unfavorable tax outcome because the statutory deadline was missed.
Although the new age‑60–63 catch‑up limit makes this particular error more likely, excess deferrals can arise for many reasons, such as contributions to multiple employer plans, payroll system errors, participant misunderstanding, or plan administration oversights. Regardless of the cause, the April 15 deadline applies universally, and missing it creates unnecessary financial consequences for participants and avoidable administrative burdens for plan sponsors.
If you discover that you have a participant with an excess deferral or you have questions on the new catch up limit, please contact any member of our employee benefits team.
