Benefits & Compensation Update: IRS Issues Important Guidance on Catch-Up Contributions under the Secure 2.0 Act

The IRS has issued proposed rules for implementing the changes under the SECURE 2.0 Act of 2022 (“SECURE 2.0 Act”) relating to enhanced catch-up contributions made by participants ages 60 to 63 and mandatory Roth catch-up contributions for certain higher income participants.

Background

As summarized in our previous update, under the SECURE 2.0 Act, beginning January 1, 2025, catch-up contribution limits for participants in 401(k), 403(b), and governmental 457(b) plans (“eligible plans”) who attain age 60-63 during the applicable calendar year were increased from the standard $7,500 annual catch-up contribution to the greater of $10,000 or 150% of the standard annual catch-up contribution limit ($11,250 for 2025). Further, beginning January 1, 2026, all catch-up contributions to eligible plans must be made on a Roth basis (after-tax) rather than on a pre-tax basis, for participants whose wages from the employer sponsoring the plan for the preceding calendar year exceed $145,000 (indexed for inflation).

Guidance Regarding Enhanced Catch-Up Contributions for Participants ages 60 to 63

Under the proposed rules, the IRS has clarified that the increased catch-up limit for participants attaining age 60 through 63 is an optional provision and not a mandatory provision, and a plan may apply the standard annual catch-up limit to all participants. However, as a practical consideration, some plan recordkeepers may automatically apply the enhanced limits to their clients’ plans.

Further, the proposed rules confirm that a plan does not violate “universal availability” requirements (which generally provide that plans offering catch-up contributions must provide an effective opportunity to participants to make the same dollar amount of contributions) merely because it utilizes the enhanced catch-up contribution limits for participants attaining ages 60-63 during the year.

Guidance Regarding Mandatory Roth Catch-Up Contributions

Deemed Roth Catch-up Election

The proposed rules permit a plan to provide that any participant who is subject to the Roth catch-up requirement will be deemed to have irrevocably designated any catch-up contributions as designated Roth contributions even if the participant’s existing election is to make catch-up contributions on a pre-tax basis.  This is intended to ease concerns plan sponsors may have regarding obtaining Roth catch-up elections from participants in order to comply with the requirement.  If a plan provides for a deemed Roth catch-up election, participants must be given the effective opportunity to make an election that is different than the deemed election (for example, a plan would need to permit a participant subject to a deemed Roth catch-up election to elect to cease making catch-up contributions).  Accordingly, it will be important for plan sponsors to timely provide participant communications that inform the participant how to make new election that is different than the deemed election.

Plans that do not provide for deemed Roth catch-up elections may provide that elective deferrals of a participant who is subject to the Roth catch-up requirement would automatically stop once elective deferrals reach the applicable limit for the year (unless the participant has made an election to designate catch-up contributions as Roth contributions).

Determination of FICA Wages Threshold

The proposed rules provide that the $145,000 (indexed) threshold for mandatory Roth catch-up contributions (the “FICA wages threshold”) is defined with respect to wages for purposes of Social Security taxes. The FICA wages threshold is not prorated for the year of hire, and a participant hired for a partial year in the preceding year must meet the full FICA wages threshold to be subject to the Roth catch-up contribution requirement. The proposed rules confirm that an individual without any FICA wages from the employer sponsoring the plan for the preceding calendar year (e.g., a partner who had only self-employment income) would not be subject to the mandatory Roth catch-up requirement under the plan in the current year.

Determination of Employer Sponsoring the Plan

The mandatory Roth catch-up requirement applies to participants whose FICA wages in the preceding year from the employer sponsoring the plan exceed the FICA wages threshold. For purposes of determining such wages, the “employer” refers to the participant’s common law employer sponsoring the plan and does not include other entities that are included in the employer’s controlled group. In the event that (i) multiple members of the same controlled group sponsor (or participate in) the same plan and (ii) a participant transferred between entities within such controlled group in the preceding year, the Roth catch-up requirement would apply in the current year only if the preceding-year FICA wages paid by the current common law employer that is the source of contributions to the plan (the entity to which the participant transferred) exceed the FICA wages threshold. The proposed rules also clarify that FICA wages would not be aggregated with FICA wages from other employers participating in a collectively-bargained multiemployer or a multiple-employer plan.

Designated Roth Contributions Treated as Catch-Up Contributions

The proposed rules clarify that all designated Roth contributions during the year (including those made prior to reaching the regular annual contribution limit) may be taken into account for purposes of determining whether the Roth catch-up requirement is satisfied.  Thus, to satisfy the requirement, a participant’s total designated Roth contributions over the course of the year need only equal the total elective deferrals that are determined to be catch-up contributions.

Roth Contribution Program Not Required

Under the proposed rules, a plan is not required to include a qualified Roth contribution program in order to comply with the mandatory Roth catch-up contribution requirement.  If a plan does not include a qualified Roth contribution program, participants exceeding the FICA wages threshold would be prohibited from making any catch-up contributions and only participants whose preceding-year wages do not exceed the FICA wage threshold could make catch-up contributions (and only on a pre-tax basis). If any eligible participant subject to the Roth catch-up contribution requirement is permitted to make Roth catch-up contributions, however, then all catch-up eligible participants (including participants whose preceding-year wages do not exceed the FICA wages threshold) must be permitted to make catch-up contributions as Roth contributions. Further, the proposed rules explain that a plan cannot require that all participants (including employees not subject to the Roth catch-up requirement) make catch-up contributions as designated Roth contributions in order to comply with the Roth catch-up requirement.

New Methods for Correcting Failures

The proposed rules include new methods for correcting pre-tax contributions that are required to be designated Roth contributions under the Roth catch-up contribution requirement, provided that the plan sponsor/administrator has in place practices and procedures designed to comply with these requirements:

• Under the “Form W-2 Correction Method,” a plan may transfer a pretax catch-up contribution that was required to be a Roth catch-up contribution to the participant’s Roth account and report the contribution as if it had been a designated Roth contribution on the participant’s Form W-2.
• Under the “In-Plan Roth Rollover Correction Method,” a plan may correct a pre-tax catch-up contribution that was required to be a designated Roth contribution by rolling over the elective deferral from the participant’s pre-tax account to a designated Roth account, which amount would be included in the participant’s taxable income for the year of conversion.

In order to take advantage of the new correction methods, a plan must provide for a deemed Roth catch-up election. The plan would be required to apply the same correction method for all participants in excess of the same applicable limit for a plan year. The deadline for the correction depends on the applicable limit that is the basis for the contribution being designated as a catch-up contribution. For example, if the basis is the limit on elective deferrals ($23,500 in 2025), the correction deadline would be April 15 of the following plan year.

Applicability Dates

Applicability Date of New Requirement. As noted above, the mandatory Roth catch-up requirement will take effect January 1, 2026.

Applicability Dates of Proposed Regulations. The proposed rules described above would apply (a) for non-collectively bargained plans, with respect to contributions in taxable years that begin after the date that is six months after the final regulations are published; and (b) for collectively bargained plans, for contributions in taxable years that begin after (i) the date described in clause (a) or (ii) if later, the first taxable year that begins after the date on which the last collective bargaining agreement related to the plan that is in effect on December 31, 2025, terminates (disregarding extensions).

Next Steps

Plan administrators are encouraged to review the above changes to catch-up contribution rules and consult with their retirement advisors, as well as their payroll departments/providers.

This update is not intended to provide legal advice with respect to any particular situation, and no legal or business decision should be based solely on its content.