401K Catch Up

401K Pre- and Post-Tax
Create an "Over 50" Transaction Type
SECURE 2.0 Act
Best Practice for Ongoing Management

401K Pre- and Post-Tax

The standard transaction type for 401K deduction has the pre-tax deduction code of 401K Deferral Reg. This means that the transaction type will deduct from the employee's pay pre-tax for taxes other than FICA and Medicare. However, it will only do so for the first (see table below) deducted. The IRS places limits on the contributions allowed to a 401K by the employee each year.  The limit is based on the calendar year.

Any amount thereafter will be deducted, but it will be post-tax. 

Year	Pretax Amount	Effective Date
2022	$20,500	01/01/2022
2023	$22,500	01/01/2023
2024	$23,000	01/01/2024
2025	$23,500	01/01/2025

This is because the code (401K Deferral Reg) is meant to be used for people under 50 or as the first $23,500 (amount accurate as of 2025) that people over 50 are allowed. After that, a new transaction type needs to be used to account for the next $7,500 for which a person over 50 is eligible. 

The "Over 50" deduction needs to be added as a new transaction type that is used specifically for the $7,500 allowed for people over 50. This new transaction type will need to have its pre-tax deduction code set to 401K CU2 Over 50 Reg. This pre-tax deduction code is applied in Admin Tools > Transaction Type > Detail tab.

Create an "Over 50" Transaction Type

You will need to create a new transaction type to account for the 401K deductions that need to be taken post-tax. To create this new transaction type:

1. Open Admin Tools > Transaction Type > Detail 
   
   
2. Click Add New 
   
   
3. Name this transaction type "401K Catch-up" or something that will prompt your users to understand it is for those over 50.
   
   
4. Set the Type field to Permanent Deduction or Deduction + Contribution (use the Deduction + Contribution option if you are contributing to an employee's 401K plans as well as deducting from the employee)
   
   
5. Set the Deduction Category to Retirement
   
   
6. The Vertex Ded Code must be 401K CU2 Over 50 Reg. This is the most important step!
   
   
7. Select all the branches with which this deduction should be shared.
   
   
8. Click Save. 

To get an employee back on track and ready to deduct the next (see table below) pretax, you will need to do a few things. 

Year	Pretax Amount	Effective Date
2022	$6,500	01/01/2022
2023	$7,500	01/01/2023
2024	$7,500	01/01/2024
2025	$7,500	01/01/2025

1. Create the new transaction type in Admin Tools > Transaction Type
   
   
2. Add the 401K Catch-up transaction type to the employee's record in Employee > Deduction and set the Yearly Limit to (see table above). Be sure to make the deduction Active as well.
   
   Note: If you are also contributing to the 401K plan as the employer, be sure to add a contribution for the 401K Catch Up as well.
   
   
3. Set 401K PreTax to the yearly contribution limit as determined by the IRS and keep it Active.
   
   
4. Reverse the employee's check that had 401K deducted post-tax. Be sure to generate original pay units and produce a new check for the employee. 
   
   Note: You should only reverse this check if the employee has already received the funds or if the funds are on an ACH file that has already been accepted by the bank. If you still have the check in hand and the employee will not receive it, you will void the check instead. Make sure you also generate original pay units and produce a new check. 

With the employee's deductions set as outlined above, the 401K deduction will take whatever its last bits are up to the contribution limit. Once that value is met, then the 401K Catch-up deduction will begin. 

SECURE 2.0 Act

Beginning in 2025, the SECURE 2.0 Act introduces a special catch-up contribution increase for individuals who are ages 60, 61, 62, or 63 at any point during the taxable year. The new catch-up contribution limit for these individuals will be the greater of:

1. $10,000, or
2. 150% of the regular catch-up contribution amount applicable for that year (indexed for inflation).

This means that if the standard catch-up limit were $7,500, those aged 60-63 could contribute up to $11,250 (150% of $7,500) as their catch-up amount, or $10,000, whichever is greater.

1. The standard catch-up contribution for those 50+ remains at $7,500 (as indexed for inflation) in 2025.
2. For individuals who are 60, 61, 62, or 63 at any point during the taxable year (born between 1962-1965 in 2025), the catch-up contribution limit increases to the greater of:
   • $10,000, or
   • 150% of the regular catch-up contribution amount
3. Since 150% of $7,500 is $11,250, the catch-up limit for those aged 60-63 in 2025 will be $11,250.

This means that in 2025, the total contribution limits would be:

• Regular employees: $23,500
• Employees age 50-59: $23,500 + $7,500 = $31,000
• Employees age 60-63: $23,500 + $11,250 = $34,750

Best Practice for Ongoing Management

For future reference, the process of setting up an employee's deductions to deduct their full (see table below) per year goes like this: 

Year	Pretax Amount	Effective Date
2022	$27,000	01/01/2022
2023	$30,000	01/01/2023
2024	$30,500	01/01/2024
2025	$31,000 (50-59) $34,750 (60-63)	01/01/2025

1. Set up two deductions on the employee record. These would be your regular 401K deduction and 401K Catch-up transaction type. 
2. Add the regular 401K deduction, making it Active with a Yearly Limit (see table above). 
3. Add the 401K Catch-up deduction, making it Inactive with a Yearly Limit of $7,500.
4. Once $23,500 has been taken from the regular 401K deduction, it will inactivate. 
5. Activate the 401K Catch-up on the employee record. This then is used until $7,500 is hit or the new year rolls around. Then, it would need to be set back to inactive and 401K Pre-Tax activated. 

This process is currently manual, but remember it only needs to be accounted for employees over 50. To help manage the process, use the Employee Deduction & Contribution List AQ to review 401K deductions for employees who are approaching their (see table below) yearly limit.

Year	Pretax Amount	Effective Date
2022	$20,500	01/01/2022
2023	$22,500	01/01/2023
2024	$23,000	01/01/2024
2025	$23,500	01/01/2025