Highlights
- The IRS has issued proposed regulations that clarify and implement "super catch-up" contributions changes and mandatory Roth catch-up contributions for "high earners" introduced by the SECURE 2.0 Act of 2022.
- Although these changes affect various forms of retirement plans, this Holland & Knight alert focuses particularly on 401(k) plans and the new requirement for "high earners" to make Roth catch-up contributions – a provision originally slated to take effect in 2024 but delayed until 2026.
The IRS has issued proposed regulations that clarify and implement catch-up contribution changes introduced by the SECURE 2.0 Act of 2022. Although these changes affect various forms of retirement plans, including 401(k), 403(b) and 457(b) plans, this Holland & Knight alert focuses particularly on 401(k) plans and the new requirement for "high earners" to make Roth catch-up contributions – a provision originally slated to take effect in 2024 but delayed until 2026.
Background on Catch-Up Contributions
Historically, retirement plans have been permitted to allow participants ages 50 and older to make "catch-up" contributions beyond the standard elective deferral limit. In 2025, the standard limit is $23,500, with an additional $7,500 allowed in catch-up contributions if the applicable plan permits.
SECURE 2.0 introduced two notable changes to this system:
- mandatory Roth treatment for catch-up contributions by high earners for taxable years beginning after Dec. 31, 2023
- optional "super catch-up" contributions for participants ages 60 to 63 for taxable years beginning after Dec. 31, 2024
Due to concerns that plan sponsors and recordkeepers would be unable to comply with the mandatory Roth catch-up requirement by the original deadline, Notice 2023-62 provided a transition period that delayed the effective date until Jan. 1, 2026 (although, a later effective date may apply for collectively bargained plans).
Affected Participants
Under SECURE 2.0 and starting with taxable years after Dec. 31, 2025, plan participants who earned more than $145,000 in Federal Insurance Contributions Act (FICA) wages (adjusted for inflation for years beginning after Dec. 31, 2024) from their employer in the prior calendar year must make catch-up contributions on a Roth basis. The IRS recently clarified several key aspects of this rule:
- Identifying High Earners. Only FICA wages paid by the plan-sponsoring employer (e.g., the participant's common law employer) count toward the $145,000 threshold.
- No FICA Wages, No Roth Mandate. Participants without FICA wages (e.g., partners who have only self-employment income) are not subject to the Roth requirement.
- No Proration for Partial Year. The $145,000 threshold is not prorated for employees who worked only part of the year.
- New Hires Not Subject to Mandate. New hires who have no income from the employer sponsoring the plan for the preceding calendar year are not subject to the Roth requirement.
For purposes of this rule, only FICA wages by the participant's common law employer sponsoring the plan are taken into account. This means that the plan sponsor and other participating affiliates are not required to consider FICA wages paid by affiliates not participating in the plan for purposes of determining whether a participant is subject to the Roth mandate. Further, FICA wages paid by one participating affiliate are not required to be aggregated with FICA wages paid by another participating affiliate for purposes of determining whether the mandatory Roth catch-up rules apply to the participant. As a result, if a participant transfers employment between participating affiliates during the same plan year, the participant could be subject to the mandatory rule for one common law employer but not the other.
Roth Requirement and Plan Design Considerations
The proposed regulations address many of the questions and concerns raised by plan sponsors regarding the mandatory Roth catch-up requirement and provide additional guidance regarding plan design options:
- No Requirement to Add a Roth Feature. If a 401(k) plan does not currently include a Roth contribution feature, the plan sponsor is not required to amend the plan to add a Roth feature. However, a participant who is subject to the mandatory Roth catch-up provision will be prohibited from making any catch-up contributions under a plan that does not include a Roth feature. This means that plans that do not include a Roth contribution program will still be required to track which participants are subject to the mandatory Roth rules.
- Rules Apply to Catch-Up and Super Catch-Up Contributions. The Roth mandate applies to both regular catch-up and super catch-up contributions. If a plan includes a Roth contribution feature, all participants, including those not subject to the mandatory Roth rules, must be permitted to make Roth catch-up contributions to the plan.
- Spillover Feature. The proposed regulations allow a spillover feature so that a separate catch-up election does not need to be provided under the plan. Once a catch-up-eligible participant makes elective deferrals up to the standard limit, all additional contributions will be treated as catch-up contributions.
- Deemed Roth Elections. Plans that have adopted both catch-up and Roth features may treat a high-earning participant's catch-up contributions as Roth, even if the participant originally elected pretax deferrals. Deemed elections are permissible regardless of whether a plan has a spillover design or provides for separate catch-up elections. However, plans must provide affected participants an "effective opportunity" to make a different election.
- May Not Require All Catch-Up Contributions as Roth. The proposed regulations do not permit a plan sponsor to require all catch-up contributions to be made as Roth contributions to avoid having to track the participants subject to the mandatory Roth requirement.
Additional Correction Options
In the event an error occurs, the proposed regulations now offer two additional IRS-sanctioned correction methods to correct a Roth catch-up contribution failure. These are available only if the plan has adopted the deemed Roth election approach described above and applies consistently to all participants:
- W-2 Correction Method. Recharacterizes contributions and adjusts W-2 reporting before issuance
- In-Plan Roth Rollover. Transfers incorrectly designated pretax contributions to Roth accounts within the plan, reported on Form 1099-R
Note that these correction methods are available only if the plan sponsor has practices and procedures in place to comply with the mandatory Roth catch-up requirement.
What Plan Sponsors Should Do Now
Although these are only proposed regulations, the guidance gives a strong signal of the IRS' intended direction. Plan sponsors should begin preparing now for the upcoming calendar year by:
- reviewing payroll systems to identify highly paid participants subject to the rule based on FICA wages
- coordinating with payroll providers and recordkeepers to support Roth contributions and deemed election rules
- considering whether to add or enhance Roth contribution features if not already in place
- consulting with legal counsel to determine which plan amendments are necessary and the deadline for adopting such amendments, updating summary plan descriptions and preparing any necessary employee communications
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
