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EMPLOYER TAX BRIEF
Final regs clarify catch-up contribution rules under SECURE 2.0
Remember the SECURE 2.0 Act? It was part of a massive year-end “omnibus” spending package signed into law in 2022.
Like many laws, SECURE 2.0 contains provisions that necessitate federal implementation guidance. One area of particular concern for employers has been how the act’s provisions impact the treatment of catch-up contributions to qualified retirement plans. Earlier this month, the U.S. Department of the Treasury and the IRS issued final regulations clarifying these rules.
Two major components
According to the IRS news release, “The final regulations provide guidance for plan administrators to implement and comply with the new Roth catch-up rule and reflect comments received in response to the proposed regulations issued in January.” In actuality, the final regs address two major components of the rules:
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Required Roth treatment. The “Roth catch-up rule” referred to above is a provision of SECURE 2.0 that requires catch-up contributions made by certain higher-income participants to be designated as Roth contributions. This means the contributions come from after-tax earnings rather than pretax salary deferrals. The final regs stipulate that employees age 50 or above with previous-year wages exceeding $145,000 (an annually inflation-adjusted amount) must make Roth-based catch-up contributions beginning with tax years after December 31, 2026.
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A higher limit for some participants. The standard catch-up contribution limit is indexed annually for inflation. For example, in 2025, it’s $7,500 for most 401(k), 403(b) and governmental 457 plans, as well as for the federal government’s Thrift Savings Plan. Under the final regs, however, the limit will rise to 110% of the standard amount for eligible participants in SIMPLE plans and to 150% of the standard amount for participants of any qualified plan (including SIMPLE plans) ages 60 through 63.
Changes to proposed rules
The IRS made several changes to the proposed rules in response to public comments.
One is that plan administrators will be allowed to aggregate a participant’s previous-year wages from certain separate common law employers in determining whether the participant is subject to the Roth catch-up rule.
Another example of changes from the proposed regs to the final ones is revised guidance on corrections related to the Roth requirement. Generally, these involve either:
- Transferring a pretax catch-up contribution to a Roth account and reporting it on Form W-2, or
- Making an in-plan Roth rollover if Form W-2 has already been filed and reporting it on Form 1099-R.
Note that a plan needn’t use the same correction method for all participants, but it must use the same correction method for similarly situated participants. Also, a correction isn’t required unless a participant’s total erroneous pretax catch-up contributions exceed $250.
Further information
If you’d like to start early, the final regs permit plans to implement the Roth catch-up rule for taxable years beginning before 2027 using any “reasonable, good faith interpretation of statutory provisions.” The IRS news release says the final regulations don’t extend or modify the administrative transition period for the Roth requirement provided under Notice 2023-62, which generally ends on December 31, 2025. Contact us for further information about SECURE 2.0 and for help managing the costs of your organization’s employer-sponsored qualified retirement plan.