The U.S. Department of Treasury and the Internal Revenue Service (IRS) has proposed regulations concerning SECURE Act 2.0 changes to retirement plan catch-up contributions. The changes include increased catch-up contributions for plan participants between ages 60 and 63 and mandatory Roth tax treatment for catch-up contributions made by certain 401(k) plan participants.
Increased Catch-Up Contributions for Certain Plan Participants
The proposed regulations relate to Section 109 of SECURE 2.0 in reflecting the new dollar amounts for individuals between the ages of 60 and 63. Beginning in January 2025, affected employees may contribute the greater of $11,250 or 150% of the current age 50 catch-up limit. When the employee turns 64, they must revert to the standard catch-up limit. Cost-of-living adjustments will apply to catch-up contribution limits in years after December 31, 2025.
The regulations also clarify that plans allowing participants within this age range to make catch-up contributions at a higher rate than other participants would not cause them to run afoul of the universal availability requirement.
These regulations are proposed to take effect for contributions in taxable years that begin six months after the publication of the final rule. However, plans may apply the changes for taxable years beginning in 2025.
Mandatory Roth Treatment for Certain Catch-Up Contributions
The proposed regulations implement Section 603 of SECURE 2.0, which requires mandatory Roth tax treatment of catch-up contributions by 401(k), 403(b) and government 457(b) plan participants whose wages for the previous calendar year from an employer-sponsor of the plan are more than $145,000. The regulations do not require plans to prorate the wage threshold for Roth treatment of catch-up contributions for a participant’s first year of hire.
Under the proposed regulations, plans providing for Roth catch-up contributions must meet the following requirements that apply to all Roth contributions:
- Plans may not exclude deemed Roth catch-up contributions from the plan participant’s gross income; and
- Plans must maintain the catch-up contributions in a designated Roth account.
The proposed rules outline the operational rules for determining what portion of a contribution is a catch-up subject to Roth treatment and correcting contributions that should have received Roth treatment. The regulations also include rules for determining which employer sponsors a plan, in the case of a multiple employer or multiemployer plan. Plans are not required to establish Roth programs under the proposed regulations, but participants subject to mandatory Roth treatment in such a plan would be unable to make catch-up contributions. Finally, the proposed regulations include guidance on nondiscrimination and universal availability requirements.
Although the Roth tax treatment rule is supposed to become effective six months after publication of a final rule, plans may apply the rule to contributions in any taxable year beginning after December 31, 2023. For taxable years after 2023, the proposed regulations permit plans to deem contributions made by participants subject to the Roth catch-up requirement as Roth contributions. However, participants must have had the chance to make a different election, including stopping their contributions altogether.
Under transitional relief outlined in the regulations, plans may continue to allow all plan participants to make pre-tax catch-up contributions until 2026, including those who exceed the income threshold. This transitional relief is available even if the plan does not provide for designated Roth contributions.
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