Proposed regulations issued on retirement catch-up contributions

Editor: Robert Venables, CPA, J.D., LL.M.

To encourage retirement savings, Congress enacted the SECURE 2.0 Act of 2022 (Division T of the Consolidated Appropriations Act, 2023, P.L. 117–328) as a continuation of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (Division O of the Further Consolidated Appropriations Act, 2020, P.L. 116–94). Although SECURE 2.0 included many provisions affecting retirement accounts in general, two of the most important ones concern what are known as “catch–up” contributions. Treasury and the IRS recently released proposed regulations (REG–101268–24) related to three changes included in SECURE 2.0 affecting catch–up contributions, specifically:

• The increase in the amount of catch-up contributions that individuals who attain the age of 60, 61, 62, or 63 during the year are allowed to make to certain employer-sponsored retirement plans allowing elective deferrals (e.g., 401(k), 403(b), and 457(b) plans) (SECURE 2.0, §109).
• The increase in the catch-up limit for employer-sponsored SIMPLE (Savings Incentive Match Plan for Employees) plans (SECURE 2.0, §117). This increase is beyond the scope of this discussion.
• The requirement that certain highly compensated employees make their catch-up contributions to employer-sponsored retirement plans on a Roth basis (SECURE 2.0, §603).

Background

An employee participating in an employer–sponsored retirement plan can choose how much to contribute to the plan. Employee contributions to an employer–sponsored retirement plan are typically referred to as elective contributions or deferrals. An annual limit is placed on the amount of elective contributions. For 2025, the maximum elective contribution is generally $23,500 (Sec. 402(g) and Notice 2024–80).

The concept known as the “catch–up” contribution was introduced by Sec. 414(v), as added by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001), P.L. 107–16. If an individual plan participant will be at least age 50 by the end of the year, the individual may make contributions in addition to the maximum contribution available to plan participants under age 50 if permitted by the employer–sponsored retirement plan document. The general catch–up contribution limit for 2025 for 401(k) plans is $7,500 (Sec. 414(v) and Notice 2024–80). As a result, the maximum contribution available to a plan participant age 50 or older could be as high as $31,000 ($23,500 plus $7,500) for 2025.

Increase to catch-up contributions

Prior to the passage of SECURE 2.0, the same catch–up contribution limit applied to all eligible plan participants age 50 or older. Effective Jan. 1, 2025, the catch–up contribution limit was increased for plan participants who attained age 60, 61, 62, or 63 during the year, under Section 109 of the SECURE 2.0 Act, which amended Sec. 414(v)(2). The catch–up contribution limit for plan participants age 60 through 63 is 150% of the general catch–up limit in effect for 2024 (i.e., the catch–up contribution limit for plan participants not aged 60 through 63). The 2024 catch–up limit for plan participants not aged 60 through 63 was $7,500 (Notice 2023–75). As a result, the increased catch–up limit for plan participants age 60 through 63 is $11,250 for 2025 ($7,500 multiplied by 1.5). Beginning in 2026, the increased catch–up limit will be indexed for inflation. Prop. Regs. Secs. 1.414(v)-1(c)(2)(i)(B) and (iii)(B) reflect these changes.

Relatedly, Prop. Regs. Sec. 1.414(v)-1(e)(1) provides an exception to the general rule that an employer–sponsored retirement plan that offers catch–up contributions must provide all catch–up–eligible participants with the same maximum catch–up contribution upper limit (i.e., the universal availability requirement). Employer–sponsored retirement plans will not fail the universal availability requirement merely because the plan has a different catch–up limit for participants age 60 through 63 than it does for all other catch–up–eligible participants. It is also important to note that the increased catch–up limit available for plan participants age 60 through 63 is not required to be adopted in an employer–sponsored retirement plan. In other words, an employer–sponsored retirement plan may limit catch–up contributions to the same lower dollar limit available to plan participants age 50 through 59 or older than 63.

Catch-up contributions for highly compensated participants

Employee contributions to employer–sponsored retirement plans are generally made on either a pretax basis or post–tax basis. Pretax contributions are typically referred as “traditional” contributions, and post–tax contributions are typically referred to as “Roth” contributions. Although 401(k) plans were established by the Revenue Act of 1978, P.L. 95–600, the ability to make Roth–designated contributions was not available until 2006, as implemented by EGTRRA 2001.

Prior to the passage of SECURE 2.0, all participants of employer–sponsored retirement plans who were eligible to make catch–up contributions could make them on a pretax (traditional) basis. Now, however, catch–up contributions by highly compensated participants must be made on a Roth basis (SECURE 2.0 Act, §603(a), which added Sec. 414(v)(7) to the Code). However, Notice 2023–62 delayed the implementation of the requirement until Jan. 1, 2026.

A highly compensated participant is defined as a participant who earned wages from the employer sponsoring the plan for the preceding calendar year that exceed $145,000 (adjusted for inflation beginning in 2025) (Sec. 414(v)(7)). The proposed regulations define “wages” for purposes of the $145,000 threshold as FICA (Federal Insurance Contributions Act) wages for purposes of calculating the employee and employer portion of the Old–Age, Survivors, and Disability Insurance (OASDI) taxes pursuant to Secs. 3101(a) and 3111(a) (Prop. Regs. Sec. 1.414(v)-2(a)(2)). As a result, the plan, the employer, and the relevant employee should know whether the employee is subject to the requirement that catch–up contributions must be made on a Roth–only basis by comparing the amount reported in box 3 of the relevant employee’s Form W–2, Wage and Tax Statement, for the preceding year to the inflation–adjusted wage threshold. This information should be available by Jan. 31 of the test year.

The preamble to the proposed regulations clarifies that if an individual did not have any FICA wages from the employer sponsoring the plan for the previous year, the individual would not be subject to the requirement to make catch–up contributions on a Roth–only basis. The preamble also cites several examples in which an individual could have compensation that exceeds the wage threshold but would not be subject to the requirement to make catch–up contributions on a Roth–only basis. Those include a partner who had only self–employment income, an individual who pays Railroad Retirement tax in lieu of Social Security tax, and a state or local government employee exempt from Social Security tax. Furthermore, the preamble to the proposed regulations confirms that there is no requirement in Prop. Regs. Sec. 1.414(v)-2 to prorate the $145,000 wage threshold for a plan participant’s first year of employment.

While Sec. 414(v)(7) does not provide a definition of the term “employer sponsoring the plan,” the proposed regulations provide that the term only refers to the participant’s common law employer contributing to the plan (Prop. Regs. Sec. 1.414(v)-2(b)(3)). They also clarify that wages paid by other entities treated as a single employer under Sec. 414(b), (c), (m), or (o) are not aggregated for purposes of determining whether a participant is subject to making catch–up contributions on a Roth–only basis.

Other compliance considerations for employers with highly compensated employees

Under Sec. 414(v)(7)(A), a retirement plan participant must elect to make Roth contributions if they are subject to the Roth contribution requirement applicable to catch–up contributions. However, the proposed regulations allow a plan to treat a participant who is subject to the Roth catch–up requirement as having deemed to have designated any catch–up contribution as a Roth contribution, even if the participant has not made an affirmative Roth election (Prop. Regs. Sec. 1.401(k)-1(f)(5)(iii)). The proposed regulations require plans that allow for the deemed Roth election to (1) treat the catch–up contributions as not excludable from the participant’s gross income and (2) maintain the contributions in a separate Roth account. The deemed Roth catch–up election is permitted regardless of whether the plan requires separate elections for contributions that are not catch–up contributions and for contributions that are catch–up contributions. However, the proposed regulations require the participant who is subject to the deemed Roth catch–up election to be provided with an opportunity to make a new election that is different than the deemed election (Prop. Regs. Sec. 1.401(k)-1(f)(5)(iv)). For example, the plan would need to allow the participant to make an election to cease making additional contributions.

The proposed regulations provide that if any plan participant who is required to make catch–up contributions on a Roth–only basis is allowed to make catch–up contributions, the plan would be required to allow all catch–up participants to make catch–up contributions on a Roth basis (Prop. Regs. Sec. 1.414(v)-2(a)(5)(i)). Thus, a plan cannot make the Roth option available only to participants who are required to make their catch–up contributions on a Roth basis. If one catch–up participant may make Roth contributions, then that option must be provided to all catch–up participants.

Technically, catch–up contributions do not begin to fund an employer–sponsored retirement plan until the general (non–catch–up) contribution limit has been reached ($23,500 in 2025). This would result in most Roth–designated contributions being made later in the year or after the general contribution limit has been reached for plan participants who wish to split their contributions between traditional and Roth. Commenters to Notice 2023–62 expressed concerns that this approach is not appropriate for participants who would prefer to have Roth contributions made throughout the year or who already made Roth contributions exceeding the catch–up limit earlier in the year. The proposed regulations provide additional flexibility by taking into account Roth contributions made before a participant’s contributions exceed the general limit (Prop. Regs. Sec. 1.414(v)-2(b)(1)). In other words, if a participant’s Roth contributions made during a year are greater than or equal to the total of the participant’s catch–up contributions, then the participant has satisfied the requirement to make catch–up contributions on a Roth–only basis.

Employer–sponsored retirement plans are not obligated to include a Roth contribution option. If an employer–sponsored retirement plan does not include a Roth contribution option, the preamble to the proposed regulations confirms that plan participants who are required to make catch–up contributions on a Roth basis would not be allowed to make any catch–up contributions. However, participants who are not required to make catch–up contributions on a Roth basis would still be allowed to make catch–up contributions. An employer–sponsored retirement plan would not violate the universal–availability requirement if the plan permits each catch–up–eligible participant to make elective contributions up to the maximum dollar amount permitted to that participant (Prop. Regs. Sec. 1.414(v)-1(e)(1)(iii)). In other words, if a plan does not include a Roth option, the maximum dollar amount permitted to a participant subject to making catch–up contributions on a Roth–only basis would be $0 (Prop. Regs. Sec. 1.414–2(b)(2)(i)).

If a plan participant’s wages for the prior year exceeded the $145,000 wage threshold requiring current–year catch–up contributions to be made on a Roth basis and that participant makes a pretax catch–up contribution, the employer–sponsored retirement plan will fail to satisfy the definition of a qualified plan unless the plan corrects the failure. A plan can correct this failure by distributing the catch–up contribution under the already existing methods for correcting an excess contribution that is not a catch–up contribution. In response to comments received with respect to Notice 2023–62, the proposed regulations provide two additional methods for correcting a pretax catch–up contribution that was required to be made on a Roth basis (Prop. Regs. Sec. 1.414(v)-2(c)):

Form W–2 correction method: Under Prop. Regs. Sec. 1.414(v)-2(c)(2)(ii), a plan would be permitted to correct a pretax catch–up contribution that was required to be made on a Roth basis by transferring the contribution (plus gains or less losses) from the participant’s pretax account to the participant’s Roth account. The contribution (not adjusted for gains or losses) would also need to be reported on the participant’s Form W–2 as a Roth contribution for the year the contribution was made. In other words, the contribution would be reported on the plan participant’s Form W–2 and deposited into the plan participant’s Roth account as if it had been contributed correctly. This correction method can only be used before the participant’s Form W–2 has been filed or provided to the participant.

In–plan Roth rollover correction method: Under Prop. Regs. Sec. 1.414(v)-2(c)(2)(iii), a plan would be permitted to correct a pretax catch–up contribution that was required to be made on a Roth basis through an in–plan Roth rollover. The plan would directly roll over the pretax catch–up contribution (plus gains or less losses) from the participant’s pretax account to the participant’s Roth account. The rollover would be reported on Form 1099–R, Distributions From Pensions, Annuities, Retirement or Profit–Sharing Plans, IRAs, Insurance Contracts, etc., for the year of the rollover.

The plan sponsor or plan administrator is required to have in place at the time the contribution is made practices and procedures designed to result in compliance with the new Roth–only catch–up contribution rules in order to use the two new correction methods. The practices and procedures must include a provision for a deemed Roth catch–up election (Prop. Regs. Sec. 1.414(v)-2(c)(3)(i)). There are deadlines for correcting failures to make catch–up contributions on a Roth–only basis. The relevant deadline depends on the type of failure (Prop. Regs. Sec. 1.414(v)-2(c)(3)(iii)).

Next steps

These new regulations are proposed to apply in tax years that begin more than six months after the date that the proposed regulations are finalized. However, taxpayers may elect to apply the proposed regulations related to increased catch–up contributions as early as Jan. 1, 2025, and the proposed regulations related to the requirement for highly compensated employees to make catch–up contributions on a Roth–only basis as early as Jan. 1, 2024. Different applicability dates apply for plans that are collectively bargained.

Employers should work with their employee benefits counsel, plan administrators, and payroll departments/payroll service providers to ensure that their retirement plan documents are updated to reflect the changes made by SECURE 2.0. Some items for employers to consider:

• Systems need to be put into place for the following items:
  • The determination of who is eligible to make additional catch-up contributions available to participants age 60 through 63;
  • The determination of which participants are required to make catch-up contributions on a Roth-only basis; and
  • The development of practices and procedures designed to result in compliance with the new rules.
• Employers need to decide whether to allow plan participants age 60 through 63 to make catch-up contributions in excess of the limits allowed to other catch-up-eligible participants.
• Employers need to decide whether to adopt a qualified Roth contribution program and the deemed Roth catch-up election option.
• Communications should be provided to affected plan participants describing the mandatory changes to the mechanics of their retirement plan accounts as well as the elective provisions that the employer has decided to include or exclude from the plan.

Editor

Robert Venables, CPA, J.D., LL.M., is a tax partner with Cohen & Co. Ltd. in Fairlawn, Ohio.

For additional information about these items, contact Venables at rvenables@cohencpa.com.

Contributors are members of or associated with Cohen & Co. Ltd.