Catching-Up on Catch-Up Contribution Changes

Seyfarth Synopsis: New proposed regulations issued by The Department of Treasury and IRS provide guidance on the provisions related to catch-up contributions that were included under SECURE 2.0 Act of 2022 (“SECURE 2.0”).

The recently issued proposed regulations address several changes to the catch-up contribution provisions made by SECURE 2.0, including the following:

• Section 603, which requires that catch-up contributions for certain participants be made on a Roth basis (i.e., the Roth Catch-Up Requirement); and
• Section 109, which increased the applicable catch-up dollar limit for those who attain age 60, 61, 62 or 63 during the plan year.

The much-welcomed proposed regulations answer a number of open questions that we had been grappling with following the issuance of SECURE 2.0. Below, we discuss the proposed regulations, answered (and unanswered) questions addressed by the proposed rules, as well as a few administrative considerations for plan sponsors and administrators.

Roth Catch-Up Requirement (Section 603) 

One of the more "controversial" provisions under SECURE 2.0 was one requiring eligible participants who make over $145,000 (subject to cost-of-living adjustments) in the prior year to make catch-up contributions on a Roth after-tax basis. In other words, employees who make over this amount in the prior year who would like to make catch-up contributions must do so on a Roth basis. Pre-tax catch-up contributions are no longer be allowed for this population. 

Under SECURE 2.0, this change was to apply to tax years beginning after 2023. However, in August 2023, recognizing concerns from plan sponsors, record-keepers and payroll providers with the administration and implementation of this provision, the IRS issued Notice 2023-62 (the "Notice"), applying a two year transition period with respect to the Roth Catch-Up Requirement. The Notice also summarized the anticipated guidance from the Treasury Department and IRS with respect to this provision, including guidance on the application of the provision to participants who do not have FICA wages, and the application of the provision to plans that have more than one participating employer. The proposed regulations are very helpful, in that they put to rest a lot of the unanswered questions.   

Q&A-1. Can a plan treat an election to make pre-tax catch-up contributions as an election to make designated Roth catch-up contributions?

Yes. If a participant is subject to the Roth Catch-Up Requirement (i.e., they have FICA wages for an employer sponsoring the plan in the prior year that exceed the threshold), an employer and/or plan administrator may treat a participant's election to make pre-tax catch-up contributions as an election to make designated Roth catch-up contributions. We anticipated this result based on the Notice mentioned above.

The proposed rules further clarify that the plan could provide for this designation whether it requires participants to separately elect catch-up contributions, or if it has a relatively common "spillover" design, where deferrals in excess of the Code Section 402(g) limit (i.e., $23,500 for 2025) continue up to the catch-up limit for eligible participants. However, this relief is conditioned on the participant having an effective opportunity to make a new election different than the deemed election (i.e., to stop making deferrals).

Q&A-2  Are participants who do not have FICA wages (e.g., partners who receive a K-1) subject to the Roth Catch-Up Requirement?

No. Under SECURE 2.0, the Roth Catch-Up Requirement applies to eligible participants with FICA wages from the employer sponsoring the plan in excess of $145,000 for the preceding year. There has been discussion since SECURE 2.0 was enacted about whether the Roth Catch-Up Requirement would “exempt” partners and others who do not have FICA wages (e.g., partners who receive a K-1).

The proposed regulations make it clear that a participant is subject to the Roth Catch-Up Requirement only if he or she has FICA wages for the preceding calendar year in excess of $145,000. In other words, eligible participants working for a partnership who only have self-employment income would not be subject to the Roth Catch-Up Requirement. The proposed regulations further clarify that the $145,000 wage threshold is not pro-rated for the first year of employment.  In other words, the employee's actual earned wages must exceed the full  wage threshold of $145,000.

There may be some administrative complexities with respect to tracking this requirement in situations where someone is promoted to a partner (for example, an accounting associate who is promoted to partner). If in the prior year the individual had FICA wages in excess of $145,000 while working as an associate, for example, they would be subject to the Roth Catch-Up Requirement during the first year as a partner, even if the individual does not have FICA wages as a partner. However, they would not be subject to the Roth Catch-Up Requirement in later years, provided they continued not to have FICA wages. This could pose some administrative challenges, particularly where individuals change positions.

Q&A-3. How is "employer sponsoring the plan" defined?

The answer to this one surprised us, and may pose some administrative complexities, particularly for plan sponsors who are part of a controlled group of companies with a transient workforce that transfers among employers within the controlled group.

As mentioned above, an eligible participant must have FICA wages from the employer sponsoring the plan in excess of $145,000 for the preceding year in order to be subject to the Roth Catch-Up Requirement. SECURE 2.0, however, did not define "employer sponsoring the plan", so one lingering question has been whether FICA wages from all employers within the controlled group is aggregated/taken into account when determining whether someone exceeds the wage threshold.

The proposed regulations clarify that when determining whether someone had FICA wages in excess of $145,000, the term "employer" refers only to the individual's common law employer who is participating under the plan. In other words, you do not aggregate wages paid by all employers across the controlled group of companies, even if there are multiple related or unrelated employers participating under the plan.

So, how does this work?  Let's assume a catch-up eligible participant worked for Employer X from January 1, 2025 through September 1, 2025, and had FICA wages during this period of $125,000.  On September 2, 2025 the eligible participant transfers to Employer Y, and has FICA wages through the end of 2025 of $25,000. Employer X and Employer Y are part of the same controlled group of companies, and are both participating employers in Happy Company 401(k) Plan.  For 2026, the participant would not be subject to the Roth Catch-Up Requirement because he did not have FICA wages in excess of $145,000 from an employer sponsoring the plan for the prior year (i.e., the Happy Company). The participant's FICA wages from Employer X and Employer Y are not aggregated for purposes of determining whether the $145,000 threshold has been met.

Q&A-4. Are plans that only allow for pre-tax contributions required to add Roth catch-up contributions?

No. The proposed regulations provide that plans without a "qualified Roth contribution program" do not have to be amended to provide for such a program.  In other words, a plan that does not allow participants to make Roth contributions do not have to be amended to allow for Roth catch-up. Instead, the plan may allow catch-up eligible participants who are not subject to the Roth Catch-Up Requirement to make pre-tax catch-up contributions even though catch-up eligible participants who are subject to the Roth Catch-Up Requirement (those who made more than $145,000 in FICA wages in the prior year) would NOT be permitted to make any catch-up contributions.

You may be asking yourself, how does this not violate the universal availability rule otherwise applicable to catch-up contributions?  The proposed regulations add Section 1.414(v)-1(e)(1)(iii), which provides for a new exception to the extent the plan permits each catch-up eligible participant to make deferrals up to the maximum dollar amount of catch-up contributions permitted under applicable law with respect to that participant. Under this application of the universal availability rule, if a plan does not have a designated Roth contribution feature, then the maximum dollar amount of Roth catch-up contributions permitted is $0 with respect to eligible participants subject to the Roth Catch-Up Requirement.

The proposed rules also address benefits, rights and features testing under Code Section 401(a)(4), noting that because the Roth catch-up wage threshold (i.e., $145,000) is lower than dollar threshold used to identify HCEs, this could impact some non-HCEs, and ultimately 401(a)4) testing. If it helps satisfy 401(a)(4) testing, the proposed regulations permit a plan to preclude one or more “regular” catch-up eligible participants who are highly compensated employees and not subject to the Roth catch-up requirement (e.g., because they did not have FICA wages for preceding year) from making catch-up contributions. 

Q&A-5. Can you make Roth available only to participants subject to the Roth Catch-Up Requirement?

No. The proposed rules provide that if any participant subject to the Roth Catch-Up Requirement is permitted to make Roth catch-up contributions for a plan year, then the plan must allow all other catch-up eligible participants to make Roth catch-up contributions for the plan year. 

The proposed rules, however, include special provisions for plans that cover both mainland U.S. and Puerto Rico employees (i.e., dual-qualified plans). Under the Puerto Rico Code, Roth contributions are not allowed, but traditional after-tax contributions are permitted, subject to special limits. The proposed regulations provide that dual-qualified plans that allow for Roth catch-up contributions will be deemed to satisfy this requirement provided Puerto Rico participants are eligible to make after-tax catch-up contributions. So, clients with dual-qualified plans will need to consider the impact of this rule on its Puerto Rico employee population. 

Q&A-6.  Can designated Roth contributions made by a participant before he or she exceeds the Code Section 402(g) deferral limit count as satisfying the Roth Catch-Up Requirement?

Yes. Under the proposed rules, designated Roth contributions made by a participant during the plan year may be counted as satisfying the Roth Catch-Up Requirement, even if they were made before the participant exceeds an applicable limit (e.g., the 402(g) limit of $23,500). In other words, if a catch-up eligible participant’s total Roth deferrals over the course of a calendar year equal or exceed the total elective deferrals that are determined to be catch-up contributions, then the participant would satisfy the Roth Catch-Up Requirement. 

Q&A-7. If a plan fails the actual deferral percentage ("ADP") test, is it permissible to recharacterize excess contributions as catch-up contribution instead of distributing them from the plan if the participant only made a pre-tax election?

Yes. The proposed regulations provide that a pre-tax deferral that exceeds an applicable limit under the plan may be treated as a designated Roth contribution, as an alternative to distributing the excess elective deferrals from the plan. One specific concern that we discussed on our Coffee Talk with Benefits Podcast was whether excess pre-tax contributions resulting from a failed ADP test could be re-characterized as Roth after the end of the plan year. Another concern is how to correct pre-tax catch-up contributions that should have been made on a Roth basis.

The proposed regulations set forth new correction procedures that can be used to correct pre-tax deferrals that exceed an applicable plan or IRS limit in lieu of distributing excess deferrals from the plan:

• Form W-2 Correction Method: Under this method, the erroneous pre-tax amounts (adjusted for earnings and losses) are transferred to a designated Roth account. The amount of the contribution transferred (not adjusted for earnings or losses) is reported as a designated Roth contribution on the participant's Form W-2 and included in the participant’s gross income for the year of deferral. This method is not available, however, if the Form W-2 for that year has already been filed or provided to the participant.
• In-Plan Roth Rollover Correction Method: The second method is to correct through an in-plan Roth rollover by directly rolling over the deferral from the participant's pre-tax account to the participant's Roth account, reporting the rollover on a Form 1099-R for the year of the rollover so that the contribution, adjusted for earnings and losses, would be included in participant’s income for the year of rollover. Presumably, if the plan sponsor wanted to use this method, the plan document would need to allow for in-plan Roth rollovers.

Note, the proposed regulations set forth additional requirements and deadlines to correct failures using these new correction methods. For example, if using one of the new methods in connection with a failed ADP test, the deadline for correcting is 2-1/2 months (6 months in the case of plans that include an EACA) after the close of the plan year for which the excess contribution was made. 

Q&A-8.  What is the effective date for these rules?

Generally, for most plans the new rules apply for contributions in tax years beginning after the date that is six months after final regulations are issued. Special rules, however, apply to collectively bargained plans. For collectively bargained plans, the new rules apply for contributions in tax years beginning after the later of (1) the first tax year beginning after the date that is six months after the final regulations are issued, or (2) the first tax year beginning after the date the last collective bargaining agreement related to the plan that is in effect on December 31, 2025 terminates, without regard to any extension of those agreements). The regulations, however, may be applied with respect to contributions made in tax years beginning after 2023. 

Increased Catch-Up Limits (Section 109)

It pays to be older-ish. By way of background, Section 109 of SECURE 2.0 amended the IRC to increase the applicable catch-up dollar limit (i.e., generally $7,500 for most catch-up individuals) for eligible participants who will turn age 60,61, 62 or 63 during the tax year.  For these eligible employees participating in an employer plan, the increased catch-up limit is 150% of the otherwise applicable catch-up limit, or $11,250 for 2025. Note, special rules apply to participants in a SIMPLE plan.

We've had a number of clients who have already amended their plans, effective as of January 1, 2025, to include the increased catch-up contribution limit. However, that doesn't mean there weren't lingering questions about this provision after the implementation of SECURE 2.0.

Q&A-1. Are plans that allow for catch-up contributions REQUIRED to provide for the increased catch-up limits?

No. The proposed regulations clarify that this provision is optional.

Note, the proposed regulations also include a new exception so that a plan allowing eligible employees to make catch-up contributions up to the increased limit will not violate the universal availability requirement. As mentioned above in our discussion of the Roth Catch-Up Requirement, this rule generally requires that all catch-up eligible participants who participate under a plan maintained by an employer be provided with an effective opportunity to make the same dollar amount of catch-up contributions. 

The proposed regulations provide that each catch-up eligible participant who participates under any applicable employer plan maintained by the employer must be able to make the maximum amount of catch-up contributions. For example, if the plan is dual-qualified in both the U.S. and Puerto Rico, this requirement is satisfied if catch-up eligible participants in Puerto Rico are eligible to contribute the maximum amount of catch-up contributions permitted under the Puerto Rico Code, while U.S. participants must be eligible to contribute the maximum catch-up contributions permitted under the U.S. Code, even though the catch-up contribution limit under the U.S. Code is higher than the limit under the Puerto Rico Code, universal availability is not violated. 

Q&A-2.  If a plan sponsor adopts the increased catch-up contribution limit for one plan, must all plans within the controlled group also adopt the increased limits?

Unclear. As mentioned above, each catch-up eligible participant who participates under any applicable employer plan maintained by the employer must be able to make the maximum amount of catch-up contributions. The proposed regulations do not appear to define the employer for this purpose, so it is not entirely clear whether all plans maintained by employers within the same controlled group are aggregated for this purpose. However, the current universal availability rule does aggregate all employers within the controlled group for purposes of determining whether the universal availability requirement is met. In any case, we think additional clarification on this piece would be helpful.  The IRS and Treasury Department are soliciting comments on the proposed regulations, which are due March 14, 2025.

Administrative Considerations and Next Steps

There are numerous challenges with programming the new, increased catch-up limits, as well as administering the Roth Catch-Up Requirement, as noted above. Many of our clients have already started to work with their internal and/or external payroll teams to prepare for the effective date of the Roth Catch-Up Requirement. For example, discussing how to track FICA wages for purposes of determining whether a catch-up eligible employee exceeds the wage threshold. 

We encourage you to speak with your Seyfarth Shaw Employee Benefits attorney to update plan documents and participant communications and prepare for the implementation of these provisions.