The IRS has issued final regulations addressing SECURE 2.0 Act changes regarding retirement plan catch-up contributions, including optional higher catch-up contribution limits for participants between the ages of 60 and 63 and mandatory Roth tax treatment for catch-up contributions by participants with prior-year wages above $145,000 (as indexed). The regulations generally track those proposed in January, with some modifications. Here are highlights:
- Increased Catch-Up Limit. The final regulations, like the proposal, provide that a plan will not fail to satisfy the universal availability requirement merely by permitting participants between the ages of 60 and 63 to make higher catch-up contributions while others are limited to a lower amount. But the preamble notes that, under the universal availability rules, if a plan applies the increased catch-up limit, all plans maintained by employers within the same controlled group must provide for the increased limit. The final regulations also explain how the higher catch-up contribution limits apply to SIMPLE plans.
- Mandatory Roth Treatment. Plans are permitted to provide that a participant subject to mandatory Roth treatment may be deemed to have irrevocably designated any catch-up contributions as designated Roth contributions. The final regulations clarify that plans may continue to apply a deemed Roth catch-up election for a “reasonable period” after a participant is no longer subject to mandatory Roth treatment (or after an amended Form W-2 is filed showing that the employee is not subject to mandatory Roth treatment). Catch-up contributions designated as Roth contributions during this period need not be recharacterized. The final regulations also provide guidance on corrections, which generally entail either transferring a pre-tax catch-up contribution to a Roth account (and reporting it appropriately on Form W-2) or, if Form W-2 has already been filed, making an in-plan Roth rollover (and reporting it on Form 1099-R). A plan does not necessarily have to use the same correction method for all participants but must use the same correction method for similarly situated participants. Correction is not required unless a participant’s total erroneous pre-tax catch-up contributions exceed $250.
In general, the regulatory provisions apply to contributions in taxable years beginning after December 31, 2026, which is generally the deadline for making necessary plan amendments. (Later deadlines may apply for collectively bargained and governmental plans.) Since the applicability date for the underlying statutory rules was earlier (generally, years beginning after December 31, 2023, for mandatory Roth treatment and years beginning after December 31, 2024, for the increased catch-up limits), a reasonable, good faith interpretation standard applies to prior years. A related news release notes that the final regulations do not extend or modify the administrative transition period that runs through the end of 2025.
EBIA Comment: The proposed regulations provided that they could be relied on, so it is helpful that the final version does not make major changes. Nevertheless, there is much to digest for plan sponsors, administrators, and service providers faced with implementing these provisions—particularly regarding correction details and other elements not addressed in the proposal. And questions remain, such as what constitutes a reasonable period for continuing deemed Roth treatment. Keep in mind that plans are not required to implement either the increased catch-up limit or a Roth program. But under a plan without a Roth program, participants subject to mandatory Roth treatment are precluded from making any catch-up contributions. For more information, see EBIA’s 401(k) Plans manual at Section VIII.F (“Catch-Up Contributions: Age 50 or Older”).
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