The proposed rule addresses how to determine whether a participant is subject to the Roth catch-up requirement, when Roth contributions are treated as catch-up contributions and other key guidance.
Benefits Administration and Outsourcing Solutions|Executive Compensation|Retirement
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The IRS has issued proposed regulations on provisions of the SECURE 2.0 Act of 2022 that affect catch-up contributions under 401(k), 403(b) and governmental 457(b) plans. SECURE 2.0 requires that participants with FICA wages over $145,000 (as adjusted) may only make catch-up contributions as Roth contributions (i.e., the Roth catch-up requirement). SECURE 2.0 also increases the maximum catch-up limit during the year in which participants attain ages 60 to 63 (i.e., super catch-up contributions).
For the Roth catch-up requirement, the proposed rule addresses:
How to determine whether a participant is subject to this requirement
When Roth contributions are treated as catch-up contributions
A compliance option for plans that do not offer Roth contributions
Efforts to comply with the Roth catch-up requirement by restricting access to catch-up contributions
The establishment of two new options to correct a Roth catch-up requirement failure due to pre-tax contributions exceeding an IRS or plan limit
The proposed rule also offers limited guidance on super catch-up contributions and most notably provides that the increased limit is optional — but that if added to a plan it must be added to all plans in the controlled group and made available to all otherwise eligible participants.
Finally, the proposed rule addresses how to implement the Roth catch-up requirement and availability of super catch-up contributions for plans that are qualified in both the U.S. and Puerto Rico.
Background
In general, a catch-up contribution is an elective deferral made under a 401(k), 403(b) or governmental 457(b) plan that is over an IRS or plan-imposed limit, including a limit required by a failed non-discrimination test. Before SECURE 2.0, catch-up contributions could be made by any participant beginning in the year the participant turned 50, as either a pre-tax or a Roth contribution. Catch-up contributions are an optional plan provision — but if offered, they must satisfy a “universal availability requirement.” This means all catch-up-eligible participants in any plan in an employer’s controlled group must have the same opportunity to make the same dollar amount of catch-up contributions.
SECURE 2.0 includes two significant changes to catch-up contributions:
The Roth catch-up requirement was added, which requires a participant to make any catch-up contributions as Roth contributions if he or she received FICA wages “from the employer sponsoring the plan” over $145,000 (as adjusted) during the prior year; this requirement is effective January 1, 2024, with a two-year transition period
Super catch-up contributions were created, which increases the catch-up contribution limit for the year in which a participant attains ages 60 to 63 to the greater of (1) $10,000, or (2) 150% of the regular catch-up amount for 2024 ($11,250 for 2025) (limit is subject to annual cost-of-living adjustments)
Roth catch-up requirement timing
The Roth catch-up requirement applies to plan years beginning after December 31, 2023. However, Notice 2023-63 established a two-year transition period so that compliance with the Roth catch-up requirement is not required until January 1, 2026.
In general, the proposed rule would apply for contributions in tax years that begin more than six months after final regulations are issued. For plans that are collectively bargained, the proposed effective date would be the later of (1) the first taxable year that begins six months after the proposed rule is finalized, or (2) the first taxable year that begins after the last collective bargaining agreement that is in effect on December 31, 2025, expires.
Finally, the proposed rule may be relied on retroactively to the effective date of the Roth catch-up requirement (plan years beginning after December 31, 2023).
Super catch-up contributions timing
Super catch-up contributions are available for tax years beginning after December 31, 2024. The proposed rule would be effective for contributions made in tax years that begin more than six months after final regulations are issued, but it may be relied upon retroactively to the date that super catch-up contributions first became available (taxable years beginning after December 31, 2024). No special timing rules are included for super catch-up contributions in plans that are collectively bargained.
Roth catch-up requirement guidance
The proposed rule addresses the guidance discussed below with regard to the Roth catch-up requirement.
Determining a participant’s FICA wages for the Roth catch-up requirement threshold
FICA wage threshold applied separately to each employer: Determining whether a participant has FICA wages over $145,000 is based on the FICA wages paid from each individual employer separately, not aggregated; therefore, even if a participant receives FICA wages from two employers in the same controlled group that participate in the same plan, whether the participant is subject to the Roth contribution requirement would be based on the wages paid from each employer separately
Definition of FICA wages: FICA wages are defined in the same way and counted in the same year as they are for Social Security tax; therefore, the Roth catch-up requirement would not apply to a participant who did not receive wages subject to FICA taxes (e.g., a partner who only receives self-employment income)
Proration not required for year of hire: Proration of the Roth catch-up requirement threshold is not required for the first year of employment
Reliance on prior year W-2 for FICA wages: A plan may use the FICA wages reported on the prior year’s W-2 to determine if a participant is subject to the Roth catch-up requirement; if that figure ends up being incorrect, the plan would need to correct any pre-tax catch-up contributions that should have been made as Roth contributions
Amounts treated as Roth catch-up contributions
Deemed Roth catch-up contribution election: A plan may provide that a Roth catch-up participant who previously elected to make pre-tax catch-up contributions will be deemed to have instead elected to make Roth catch-up contributions (i.e., deemed Roth catch-up election); however, the Roth catch-up participant must be given an opportunity to make a new election (i.e., to reduce or cease making any catch-up contributions). A plan’s election to provide for deemed Roth catch-up elections would need to be documented in the plan. This election could be included in the amendment required to comply with SECURE 2.0, which is not required until December 31, 2026[1]
Availability of Roth catch-up contributions: If a Roth catch-up participant is eligible to make Roth catch-up contributions, all other catch-up-eligible participants must also be eligible to make Roth catch-up contributions
All Roth contributions are applied to the Roth catch-up requirement: Roth contributions made at any point during the plan year would be taken into account when determining if the Roth catch-up requirement is satisfied
Special rule for plans that do not permit Roth contributions: The proposed rule does not require a plan to offer Roth contributions; instead, a plan that does not provide for Roth contributions may satisfy the Roth catch-up requirement by not allowing Roth catch-up participants to make any catch-up contributions. Such a plan should monitor whether a catch-up-eligible participant has compensation over the Roth catch-up requirement threshold and, if so, prevent this participant from making any catch-up contributions. The plan would also be required to demonstrate that the availability of catch-up contributions is non-discriminatory
Roth catch-up requirement under 403(b) plans: The proposed regulations would incorporate many of the rules regarding Roth contributions under 401(k) plans into the 403(b) regulations
Roth catch-up requirement corrections
Under the proposed regulations, if elective deferrals that exceed a statutory limit, employer-provided limit or ADP limit fail to be catch-up contributions because there is not a designated Roth contribution, correction is required. The proposed rule includes three approaches for correcting a Roth catch-up requirement failure:
Distribution of excess deferrals method: The plan would distribute the excess under the existing rules for correcting violations of the limit (i.e., 402[g], 415 or actual deferral percentage test failure); this option is based on existing law
W-2 correction method: The pre-tax deferral adjusted for earnings or losses would be transferred to the participant’s Roth contribution account, and the amount of the deferral (excluding any earnings or losses) would be reported on the participant’s W-2 as a Roth contribution
In-plan Roth rollover correction method: A pre-tax deferral adjusted for earnings or losses would be converted to a Roth contribution through an in-plan Roth rollover. The amount converted would be reported on a Form 1099-R and reported in the participant’s income in the year of the rollover
Plans prohibited from requiring all catch-up contributions be made as Roth contributions
Plans may not avoid Roth catch-up requirement failures by requiring all catch-up contributions be made as Roth contributions. The IRS states that this approach is not permitted because one of the requirements for offering Roth contributions is that it must be elected in lieu of the pre-tax elective deferrals that a participant is otherwise eligible to make.
Super catch-up contribution guidance
The proposed rule generally incorporates the higher catch-up limit for the year in which a participant attains ages 60 to 63 and importantly clarifies that the increased catch-up limit is an optional plan provision (i.e., a plan need not offer super catch-up contributions simply because it offers the normal age 50 catch-up contributions). However, in accordance with the universal availability requirement, if an employer has multiple plans and wants to increase the limit for participants ages 60 to 63 in one of those plans, it would generally also need to do so in the others.
The proposed rule adds an exception that super catch-up contributions would not violate this universal availability requirement despite only being available to participants in the year they attain ages 60 to 63; however, it does not address whether collectively bargained employees who are otherwise eligible may be excluded from making super catch-up contributions in situations where the collectively bargained employees are otherwise permitted to make the regular age 50 catch-up contributions.
Special rules for dual-qualified plans
The Roth catch-up requirement and the rule allowing super catch-up contributions create unique challenges for plans dual-qualified in the U.S. and Puerto Rico. For example, the Puerto Rico tax code has a much lower catch-up contribution limit than the U.S. tax code has and does not permit super catch-up contributions. The Puerto Rico tax code also does not allow for Roth contributions, which directly clashes with the Roth catch-up requirement. These conflicts also create issues under the universal availability requirement for any U.S. employees who participate in a dual-qualified plan.
The proposed rule addresses these issues for dual-qualified plans:
For the Roth catch-up requirement, a dual-qualified plan could allow Roth catch-up participants who are U.S. employees to make Roth catch-up contributions, and the universal availability requirement may be satisfied by allowing those who are Puerto Rico residents to make catch-up contributions as after-tax deferrals
For super catch-up contributions, a dual-qualified plan may limit the maximum catch-up contribution for participants who are Puerto Rico employees to the maximum permitted under the Puerto Rico tax code; the IRS requested comments on the application of the limits in the case of an employee who performs service for an employer both in Puerto Rico and the U.S. in the same year
Going forward
Plan sponsors should consider whether to offer super catch-up contributions and whether any plan changes should be based on the proposed rule; they should also discuss with payroll providers and recordkeepers any changes they are considering in connection with the proposed rule
Sponsors should consider reviewing their plan communications and developing an approach to explain the Roth catch-up requirement and, if made available, the super catch-up contributions to plan participants
For plans that have not yet taken steps to comply with the Roth catch-up requirement, action is needed ahead of the expected January 1, 2026 effective date.
