The Internal Revenue Service has released proposed regulations on changes to catch-up contribution rules under the Secure 2.0 Act, answering major questions created by the sweeping retirement law.
The proposal answers questions about “the mandatory catch-up contributions that have to go to the Roth 401(k) for higher income employees,” Ed Slott of Ed Slott & Co. told ThinkAdvisor. It also explains how the new supersize catch-up contributions for those aged 60 to 63 will work.
Starting in 2026, catch-up contributions for those earning more than $145,000 per year will have to be done after taxes to a designated Roth account. This provision of the Secure 2.0 Act was delayed by two years.
The high-income threshold of $145,000 in FICA wages for 2024 and 2025 is indexed and could increase in the future, Slott explained.
The Roth requirement was intended to help pay for the Secure 2.0 Act, retirement expert Mark Iwry said.
"After granting plans a two-year reprieve from the original Jan. 1, 2024, compliance deadline, Treasury has now issued proposed regulations answering plan sponsors’ questions about how to comply,” he said. “If final regulations are published (following public comments and a hearing) by the end of June, plans will need to comply" with those regulations beginning Jan. 1, 2026.
The new guidance clarifies that plans that allow normal catch-up contributions for workers 50 and older are not required to allow supersize catch-up contributions for 60- to 63-year-olds, said Iwry, a nonresident senior fellow at the Brookings Institution who led retirement policy during the Obama administration.
For 2025, the higher catch-up contribution limit for this age group is $11,250 instead of $7,500.
The guidance also addresses plans that don’t offer Roth contributions.
The proposed regs provide that, "if a plan does not allow any Roth contributions, participants who would be subject to the required Rothification of their catch-up contributions are prohibited from making catch-up contributions altogether, but the plan generally may allow other participants to make catch-up contributions,” Iwry added.
In practice, many more employers would need to add a Roth option, because without one, "higher-paid employees could not make any catch-ups at all — pre-tax or Roth," Slott said.
"Employers would likely be uncomfortable with this arrangement because it would alienate its highest-earning employees,” he continued. “Further, the regulations would require that this kind of catch-up feature pass nondiscrimination testing. So, the practical impact is that plans without a Roth contribution option will likely have to introduce it for 2026."
Added Slott: "This is the only mandatory Roth rule in Secure 2.0. But most affected employees would probably be better off making catch-up contributions on a Roth basis anyhow."
Recordkeeping Costs
With the new plan, the IRS "mostly confirmed what it had already said in Notice 2023-62," which came out in August 2023, Slott said.
The IRS released its new proposal almost a year in advance of the effective date, Slott continued, as 401(k) recordkeepers "have been begging for official guidance.”
Under the new requirements, "recordkeepers will have to reprogram their systems to start requiring Roth catch-ups by looking at previous-year FICA W-2 wages. That’s apparently a major undertaking," Slott said.
"As an example, for higher-paid employees who elect to have their catch-ups made pre-tax, the recordkeeper must be able to override that election. And for plans that don’t allow Roth contributions at all, the recordkeeper must be able to block higher-paid employees from making any catch-ups — pre-tax or Roth."
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