Congress’s SECURE 2.0 Technical Corrections- Fix Roth Catch-up & Auto 401(k)s

Originally Published on 12/14/23

by Prof. Robert Bloink and Prof. William H. Byrnes

Members of Congress have now released a draft of proposed technical corrections to the SECURE Act 2.0. While the new law was by and large beneficial to retirement savers, it did make some significant changes that would have a negative or questionable impact on retirement savers. The proposed technical corrections bill would correct some of the most glaring mistakes in the SECURE Act 2.0. While it is far from certain if and when the proposal will be passed into law, the proposal does give taxpayers confidence that Congress intends to correct the most important mistakes so that the legislation can be put into place as intended.

Roth Catch-up Contribution Corrections

SECURE 2.0 greatly changed the rules governing catch-up contributions to company-sponsored retirement plans. Starting in 2025, a new special catch-up contribution is permitted for taxpayers who are between ages 60 and 63. That contribution limit will be equal to the greater of (1) $10,000 or (2) 150 percent of the standard catch up contribution limit for 2024. The $10,000 limit will also be indexed for inflation.

While this provides a powerful savings benefit for taxpayers who may have gotten a slow start when it comes to retirement savings, Congress also made a serious mistake when drafting the legislation. Because of the way the law was drafted, it accidentally removed the provision governing catch-up contributions entirely starting in 2024—meaning that no taxpayer would be entitled to make any catch-up contribution.

The technical corrections bill would correct this mistake and give effect to the original intent of the SECURE Act 2.0 in creating the so-called “super catch-up contributions” without eliminating the ability of any eligible taxpayer to make catch-up contributions under the law as previously drafted.

The correction would be effective to the start of 2024, meaning that catch-ups will be permitted even if the law isn’t actually passed until early 2024.

Starter 401(k) Corrections

The SECURE Act 2.0 also created a so-called “starter 401(k)” option. Employees of employers who adopt starter 401(k) plans are automatically enrolled. The minimum auto-enrollment contribution rate will range from 3% to 10%. Each year, the minimum contribution rate will then increase by 1% until the rate reaches 15%. The corrections bill will extend the effective date for the 15% increase to January 1, 2026 (the maximum will remain at 10% for 2024 and 2025).

In the SECURE Act 2.0, the maximum contribution amount for these starter plans was set at $6,000. That was the maximum contribution limit for IRAs in 2022. However, the new provision does not become effective until 2024, when the contribution limit for IRAs increases to $7,000.

The correction explicitly ties the maximum contribution for starter 401(k)s to the maximum contribution limits for IRAs. Only employees are permitted to make elective contributions to these starter 401(k) accounts (employees cannot make matching or non-elective contributions). Starter 401(k)s that qualify are automatically treated as satisfying the ADP and nondiscrimination tests that typically apply to traditional 401(k) plans.

The age when mandatory distributions begin was also corrected to reflect Congressional intent (the required beginning age is 73 for tax years starting in 2023 and 75 for tax years starting in 2033).

Conclusion

The corrections proposal also addresses some more technical errors that were contained in the original legislation. However, it appears that this legislation would have to be tied to a funding bill early in 2024—because Congress has already approved government funding through the end of 2023.

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