IRS Issues Proposed Regulations on SECURE 2.0 Catch-Up Contribution Changes

The Internal Revenue Service (IRS) issued proposed regulations providing guidance on how to interpret and implement changes to "catch-up" contributions made by the SECURE 2.0 Act of 2022 (SECURE 2.0). The regulations mainly focus on mandatory Roth catch-up contributions for highly paid participants, but also address issues relating to "super catch-up" contributions for participants who are ages 60 to 63.

OVERVIEW OF CATCH-UP CONTRIBUTIONS AND SECURE 2.0 CHANGES

Dating back to the Economic Growth and Tax Relief and Reconciliation Act of 2001, 401(k), 403(b), and governmental 457(b) plans have been able to offer participants who are age 50 or older the opportunity to make additional pretax (and now Roth) “catch-up contributions” over and above the regular annual limit on elective deferrals. For example, participants who are age 50 or older in 2025 may make additional catch-up elective deferrals of up to $7,500 on top of the regular annual limit on elective deferrals of $23,500.

SECURE 2.0 made two significant changes to these catch-up contribution rules:

Mandatory Roth Catch-Up Contributions for Highly Paid Employees

For tax years beginning after December 31, 2023, catch-up contributions made by a plan participant who received more than $145,000 in wages (as adjusted for changes in the cost of living) during the preceding year mandatorily must be made on a Roth basis. More detailed information about the SECURE 2.0 mandatory "Rothification" of catch-up contributions can be found in our January 5, 2023 LawFlash.

Super Catch-Up Contributions

For taxable years beginning after December 31, 2024, plans can offer participants who reach ages 60 to 63 during the plan year the opportunity to make additional "super catch-up" contributions over and above the regular catch-up contribution limit. The increased super catch-up contribution limit for participants who reach ages 60 to 63 is the greater of $10,000 or 150% of the regular age 50 catch-up contribution limit. For 2025, the super catch-up contribution limit is $11,250 ($3,750 higher than the regular age 50 catch-up contribution limit).

Following enactment of SECURE 2.0 in late 2022, a wide range of stakeholders (plan sponsors, practitioners, plan recordkeepers, and payroll providers) immediately started to raise issues and concerns about how to implement these changes—with particular focus and alarm regarding the uncertainty and administrative complexity of implementing mandatory Roth catch-up contributions as early as January 1, 2024. For example, there was uncertainty about how to identify precisely which highly paid participants were subject to the rules, how to interpret and apply participants' deferral elections (which initially may have been to contribute pretax and not Roth contributions), and other issues. The IRS responded to stakeholders' concerns and issued guidance in 2023 that delayed the implementation of mandatory Roth contributions for an additional two years (i.e., until tax years beginning after December 31, 2025), while also providing some preliminary indications of how the IRS intended to interpret and apply the SECURE 2.0 changes. More detail about this relief can be found in our August 23, 2023 blog post.

GUIDANCE ON MANDATORY ROTH CATCH-UP CONTRIBUTIONS

The proposed regulations issued in January 2025 respond to many of the stakeholder questions and concerns that were raised following the enactment of SECURE 2.0 and provide helpful guidance on how to interpret and apply the mandatory Roth catch-up contribution requirement. In particular, the proposed regulations provide guidance on the following issues: 

Deemed Roth Catch-Up Contribution Elections

The proposed regulations permit plans to deem a participant who is subject to the mandatory Roth catch-up requirement as having irrevocably designated any elected catch-up contribution as Roth contributions. The proposed regulations further provide that plans can apply this deemed Roth contribution election rule regardless of whether the plan provides for a separate election for catch-up and non-catch-up contributions or a "spillover" design where non-catch-up contributions automatically convert to catch-up contributions when the plan’s regular annual contribution limit is exceeded.

This means that a plan can provide that a participant is deemed to have elected Roth catch-up contributions even if the participant initially elected to make catch-up contributions on a pretax basis. However, under the proposed regulation, a plan can apply this deemed election rule only if the plan provides participants with an "effective opportunity" under the facts and circumstances to make a different election. These facts and circumstances include providing the participant with adequate explanation of the availability to make a new election to avoid the deemed election (e.g., an election to stop making elective deferrals that might be treated as mandatory Roth catch-up contributions), the period during which the new election may be made (which must be at least once during each plan year), and any other conditions on the new election.

Note: The preamble to the proposed regulations notes that the regulations will change the regulations for 401(k) and 403(b) plans to include the deemed election rule, but not the regulations for governmental 457(b) plans because the Roth contribution regulations for governmental 457(b) plans are still in proposed form. Accordingly, while it seems that the deemed Roth catch-up contribution election rule should apply to governmental 457(b) plans, the proposed regulations do not expressly make this change.

Designated Roth Contributions Treated as Catch-Up Contributions

The proposed regulations clarify and confirm that designated Roth contributions made at any point during a year (including before a participant has made any catch-up contributions) count toward the mandatory Roth catch-up contribution requirement. This means that so long as the aggregate amount of designated Roth contributions made by a participant during the year equal or exceed the participant's catch-up contribution limit, the participant will be treated as satisfying the mandatory Roth catch-up contribution requirement regardless of when the contributions are actually made to the plan (i.e., before or after a plan or the regular annual contribution limit is exceeded).

Plans Without a Roth Option

The proposed regulations confirm that a plan is not required to offer a designated Roth contribution option in all circumstances. This means that a plan that does not permit catch-up contributions does not need offer a Roth contribution option. Further, a plan does not need to offer a Roth contribution option if the plan prohibits highly paid participants who would otherwise be subject to the mandatory Roth catch-up contribution requirement from making catch-up contributions to the plan (but the plan could still permit all other non-highly paid participants to make catch-up contributions on a non-Roth basis).

However, if a plan permits highly paid participants to make catch-up contributions subject to the mandatory Roth catch-up contribution rules, the plan must offer a Roth contribution option to all employees. Although this potentially is helpful guidance for plan sponsors who may not want to offer a Roth contribution option, it would be a significant step to eliminate (or not offer) catch-up contributions simply to avoid having to offer a Roth contribution feature. Similarly, if a plan makes catch-up contributions available only to non-highly paid participants who are not subject to the mandatory Roth catch-up contribution rules, the plan would still need to implement procedures to identify highly paid participants to ensure such participants are not permitted to make any catch-up contributions under the plan. Accordingly, plans that currently do not offer a designated Roth contribution option but that wish to continue offering catch-up contributions ultimately may determine that adding a Roth option is the preferred approach under the circumstances.

Compensation Issues and Identifying Highly Paid Participants

The proposed regulations provide helpful guidance to identify highly paid participants who are subject to the mandatory Roth catch-up contribution requirements. The statutory text in SECURE 2.0 generally provides that the rules apply to a participant who has "FICA" wages for "the preceding calendar year from the employer sponsoring the plan that exceed $145,000" (as adjusted for changes in the cost of living) This deceptively simple phrasing raised a host of issues and questions that are addressed in the proposed regulations:

• The proposed regulations confirm that participants with no FICA wages (e.g., partners who have only self-employment income and government employees whose services are excluded under Section 3121(b)(7) of the Internal Revenue Code without regard to Code Section 3121(u)) are not subject to the mandatory Roth catch-up contribution rules.
• The $145,000 (as adjusted) wage threshold is not prorated for a partial year of employment. Accordingly, employees who only work a portion of the preceding year and do not have wages in excess of the $145,000 (or adjusted) wage threshold will not be subject to the mandatory Roth catch-up contribution rules for that year.
• Only FICA wages with the employer sponsoring the plan are taken into account and the phrase "employer sponsoring the plan" is defined very narrowly to mean only the participant's direct common-law employer who is participating in the plan. Notably, this means that wages an employee may receive from another employing entity in the same employer's "controlled group" of companies are not taken into account. While this interpretation may have the effect of limiting the employees who are subject to the mandatory Roth catch-up contribution rules in certain instances, plan sponsors with multiple employing entities and employees transferring between the entities will need to carefully consider this rule and accurately track employees' wages with each employing entity.

Correcting Failures to Comply with the Mandatory Roth Catch-Up Rules

In apparent recognition of the complexity of the mandatory Roth catch-up contribution rules and the corresponding administrative challenges, the proposed regulations identify two new methods (in addition to the existing method of refunding excess contributions to participants) that plans may use to correct a failure to comply with the rules as follows:

• Under the “Form W-2 Correction Method,” a plan may transfer a pretax catch-up contribution (adjusted for allocable gain or loss) that was required to be a Roth catch-up contribution to the participant’s Roth account. The plan would report the pretax catch-up contribution amount (not adjusted for allocable gain or loss) on the participant’s Form W-2 for the year of deferral as if it had been correctly designated as a Roth contribution in the first instance. This correction method is only available for a year if the error is discovered and corrected before a participant's Form W-2 has been filed or provided to the participant.
• Under the “In-Plan Roth Rollover Correction Method,” a plan may rollover pretax catch-up contributions (adjusted for allocable gain or loss) that should have been designated as Roth catch-up contributions to the participant's Roth account through an in-plan Roth rollover (though it is not entirely clear whether a plan must otherwise permit in-plan Roth rollovers to utilize this correction method or if the availability of the in-plan Roth rollover can be limited to the correction of mandatory Roth catch-up failures). This in-plan Roth rollover, which would reflect the allocable gain or loss on the pretax catch-up contribution, would be reported on Form 1099-R and includible in the participant's income for the year of the rollover.

These new methods are available only if the plan has established practices and procedures that are intended to comply with the mandatory Roth catch-up requirements, the plan provides for deemed Roth catch-up elections as described above, and the same correction method is applied to all participants with deferrals in excess of the same applicable limit for a particular plan year. There are also overall deadlines for corrections based on whether the contributions exceed the elective deferral limits (April 15 of the following plan year), annual additions limits (applicable deadline to correct annual additions failures), or nondiscrimination testing failures (applicable deadline to correct average deferral/contribution percentage testing failures).

Effective Date

The regulations will apply with respect to contributions in taxable years that begin after the date that is six months after the final regulations are published. However, a plan sponsor voluntarily may choose to apply the regulations with respect to contributions in taxable years beginning after December 31, 2023. For collectively bargained plans, the regulations will apply with respect to contribution in taxable years beginning after the later of: (1) the first taxable year beginning after the date that is six months after the final regulations are published, or (2) the first tax year beginning after the date the last collective bargaining related to the plan that is in effect on December 31, 2025 terminates (determined without regard to any extensions).

GUIDANCE ON “SUPER CATCH-UP" CONTRIBUTIONS

While there are fewer open questions regarding "super catch-up" contributions as compared to mandatory Roth catch-up contributions, the proposed regulations also provide helpful clarifications of a few points. In particular, the proposed regulations confirm that offering super catch-up contributions is optional and not mandatory. Further, the proposed regulations confirm that a plan does not violate the "universal availability" requirement (which generally requires that all plan participants have the same opportunity to make catch-up contributions) simply by allowing participants who reach ages 60 to 63 during the year to make super catch-up contributions.

The regulations relating to super catch-up contributions will apply with respect to contributions in taxable years that begin after the date that is six months after the final regulations are published. However, a plan sponsor voluntarily may choose to apply the regulations with respect to contributions in taxable years beginning after December 31, 2024.

NEXT STEPS

While these proposed regulations provide helpful guidance on certain questions and issues relating to the SECURE 2.0 catch-up contribution changes, the regulations also make clear that implementing these requirements will be a complex undertaking for stakeholders (particularly with respect to the mandatory Roth catch-up contributions). Accordingly, plan sponsors who are not already doing so should immediately start work to comply with these requirements, including coordinating with recordkeepers and payroll providers to ensure that plans are ready to comply with the mandatory Roth catch-up contributions effective as of January 1, 2026.

If you have any questions about the impact of the proposed regulations, or SECURE 2.0 in general, please contact the authors of this LawFlash or your regular Morgan Lewis employee benefits contact.