SECURE 2.0 Update: IRS Issues Proposed Rules for Qualified Retirement Plans (Part One)—Catch-Up Contributions

Amanda Wilke, CEBSFebruary 5, 2025February 5, 2025Post a Comment

On Friday, January 10, 2025, the Department of the Treasury and the Internal Revenue Service (IRS) issued guidance for several provisions of the SECURE 2.0 Act of 2022 (SECURE 2.0). This blog will primarily focus on the proposed rule for qualified retirement plans that allows participants who have reached age 50 to make catch-up contributions and increased catch-up limits for participants who have reached ages 60-63.

The proposed rule impacts catch-up contributions to certain types of employment-based retirement plans beginning January 1, 2026:

Employees earning more than $145,000 in Federal Insurance Contributions Act (FICA) wages (those subject to Social Security taxes) from the prior year must make catch-up contributions to their 401(k), 403(b) or governmental 457(b) plan on a Roth (after-tax) basis. The $145,000 threshold will be indexed annually for inflation.
Additional catch-up contributions to 401(k), 403(b), governmental 457(b), SIMPLE IRA and SIMPLE 401(k) plans are allowed for employees ages 60-63.

Comments on both catch-up proposals are due April 7, 2025.

Roth Catch-Ups for High-Income Participants

Under Internal Revenue Code Section 414(v), plans may allow participants in 401(k), 403(b) and governmental 457(b) plans who are age 50 or older to make catch-up contributions to their retirement plan accounts, in addition to regular deferrals.

If a plan chooses to offer Roth catch-up contributions, the newly proposed rule applies to an employee:

Age 50 and older;
Participating in a 401(k), 403(b) or governmental 457(b) plan; and
Whose prior-year Social Security wages from an employer-sponsored plan exceeded $145,000. The $145,000 threshold is based on FICA wages earned from the participant’s common-law employer, without consideration of controlled group rules.

Under the proposed rule, “a plan that provides for such a deemed Roth catch-up election would be required, as is the case for any other designated Roth contribution, to:

Treat catch-up contributions subject to the deemed Roth catch-up election as not excludible from the participant’s gross income, and
Maintain the catch-up contributions in a designated Roth account.”

The proposed rule makes several clarifications regarding administration:

No Roth feature is ok. A plan is not required to implement a Roth catch-up feature. If a plan doesn’t implement the feature, then participants age 50 and older who earn above $145,000 cannot make catch-up contributions at all.
Traditional pre-tax option. Participants earning $145,000 or less must still have the option to make traditional pre-tax catch-up contributions. Plans cannot require Roth-only catch-ups for participants.
Opting out. Participants who are eligible to make Roth catch-up contributions must have the option to opt out of making them. If they opt out of the Roth provision, they cannot make catch-up contributions at all.
Wage threshold. The $145,000 wage threshold is not prorated for the first year of employment. The employee’s actual earned wages must exceed the full wage threshold.
Deemed Roth elections. Plans may treat a participant’s pre-tax election as a deemed Roth election for those subject to the Roth catch-up rule, provided the plan allows participants the opportunity to make a different election.

Multiemployer Plans

The proposed rule applies the FICA wages test separately for each employer in a multiemployer plan. Employers are not combined even where a person works for two contributing employers for the plan in the same or consecutive years.

Segal provides an example to illustrate this concept in multiemployer plans. “Assume an employee who works for Employer A, a contributing employer to the plan, earns $145,000 in year one, and also works for Employer B, also a contributing employer to the same plan, earning $100,000 in the same year one. The employee would be subject to the Roth restriction in year two if they work even one hour for Employer A in year two. However, if they do not work for Employer A at all in year two but do work for Employer B in year two, they would not be subject to the Roth restriction in year two even if they earned $145,000 or more from Employer B in year two.”

Corrections

At times, contributions could be classified incorrectly and would need to be corrected within the plan year. For example, when a participant earning over $145,000 mistakenly makes Roth catch-up contributions as pre-tax catch-up contributions, the plan would need to correct the type of contribution. The proposed rule includes two correction methods, Form W-2 corrections and in-plan Roth rollovers, in addition to IRS’s Employee Plan Compliance Resolution System (EPCRS). A plan can use either correction method but must use the same method for all participants with deferrals over the applicable limit in a plan year.

Form W-2 Correction Method. A plan could transfer the improper contributions (adjusted for allocable gain or loss) from the participant’s pre-tax account to the participant’s designated Roth account and adjust the participant’s Form W-2 for the year of improper contributions. This method can be used only if the participant’s Form W-2 for that year has not yet been filed or given to the participant.
In-Plan Roth Rollover Correction Method. A plan could directly roll over the catch-up contribution (adjusted for earnings and losses) from the participant’s pre-tax account to the participant’s Roth account and report the amount of the in-plan Roth rollover on Form 1099–R for the year of the rollover.

The deadline for correcting mistakes depends on the circumstances, including the timing of the correction.

Applicability Dates

Plans are permitted to apply the proposed rule for taxable years beginning after December 31, 2023, the original effective date under SECURE 2.0. However, due to the administrative complexity of the rule, the Roth catch-up rule compliance deadline was postponed to 2026. Years 2024 and 2025 are considered transition years. The proposed rule will become final six months after the date of publication of the final rule.

For collectively bargained plans, the applicability of the final rule is delayed until the later of the general rule (six months after the publication of the final rule) is effective or the first calendar year that begins after the date on which the last collective bargaining agreement related to the plan that is in effect on December 31, 2025, expires.

Increased Catch-Up Limits for Ages 60-63

SECURE 2.0 introduced another update regarding catch-up contributions—higher catch-up limits (also known as “super catch-up limits”) for individuals ages 60-63, effective January 1, 2025.

Under the proposed rule:

For 2025, employees ages 60-63 can contribute the greater of $11,250 or 150% of the current age 50 catch-up limit
At age 64, the limit reverts to the standard catch-up amount
Starting in 2026, increased catch-up amounts are subject to cost-of-living adjustments
Special rules apply to participants in SIMPLE plans, which are beyond the scope of this blog.

The increased limits are optional for plans. Employers may choose not to implement increased limits and can instead apply the standard catch-up limits to all eligible participants.

Universal Availability

The universal availability rules apply to 403(b) plans. Under these rules, 403(b) plans must allow all catch-up-eligible participants an opportunity to make the same dollar amount of catch-up contributions.

Under the proposed rule, there would be an exception whereby plans using the higher catch-up limits for participants ages 60-63 will not violate universal availability rules.

Next Steps for Employers

Employers should take the following steps to prepare for changes resulting from the Roth catch-up provision and the increased catch-up provision for employees ages 60-63:

Examine current plan options. Check to see whether the plan already includes a Roth contribution option. If not, consider adding one to accommodate high-earning participants.
Update plan documents. If your plan includes a Roth option, ensure plan documents reflect the Roth catch-up requirements and optional higher limits for participants ages 60-63.
Communicate with participants. Explain the upcoming changes to Roth contributions and the availability of higher catch-up limits for eligible participants.
Update payroll systems. Develop processes and update systems to track eligible participants, the $145,000 earnings threshold, FICA wages and the facilitation of deemed Roth catch-up elections.
Implement correction procedures. Adopt procedures for correcting errors when a participant mistakenly makes a Roth catch-up contribution as a pre-tax catch-up contribution.
Consult with service providers. Discuss required administrative updates, plan amendments and implementation questions with service providers.

Remember that the proposed rule is still proposed and may change before becoming a final rule. Part two of our blog series will discuss the SECURE 2.0 requirement stating that new defined contribution retirement plans must include an automatic enrollment feature. Stay tuned to the International Foundation for additional updates on SECURE 2.0 provisions and visit our SECURE 2.0 Toolkit.

Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.