Welcome relief on SECURE 2.0 catch-up contribution Roth requirement
As a result, plans can continue to permit all participants (regardless of their prior year FICA wages) to make catch-up contributions on a pretax basis until 2026. This delay means that plans without Roth won't be required to add Roth until 2026; however, plan sponsors may want to start discussing Roth start dates with their recordkeepers to:
- make sure their Roth implementation date can be accommodated systematically, and
- avoid having to do a separate 2026 amendment just for this provision.
Clarifying an unintended rule on catch-up contributions from SECURE 2.0
In response to practitioner concern that SECURE 2.0 unintentionally precluded all participants from making pretax catch-up contributions, the notice confirms that wasn’t the intent of SECURE 2.0 and that all participants can continue making pretax catch-up contributions (and at least until 2026 for affected participants). There’s some uncertainty whether this issue was fully fixed for governmental 457(b) plans.
Guidance expected from the IRS
The IRS also said that when guidance on this provision of SECURE 2.0 is issued, it expects that guidance to include the following:
- Participants without FICA wages for the prior year can make catch-up contributions on a pretax basis without restriction. This means that self-employed persons, partners, and governmental employees who don't participate in Social Security won't be required to make catch-up contributions on a Roth basis.
- A plan can operationally treat catch-up contributions as Roth if a participant’s FICA wages for the prior year exceeded $145,000, even if the participant only has a pretax catch-up election in effect. Employers won't be required to resolicit Roth elections from such participants. For those with FICA wages for the prior year of $145,000 or less, catch-up contributions would be pretax unless the participant designated them to be Roth.
- In multiple employer plans, pooled employer plans, and multiemployer plans, in determining whether a participant is an affected participant, FICA wages with unrelated participating employers are disregarded; therefore, if a participant has $145,000 in FICA wages for the prior year from participating Employer A and has FICA wages equal to or less than $145,000 from unrelated participating Employer B, any catch-up contributions made on compensation from Employer A must be Roth, and any catch-up contributions made on compensation from Employer B can be pretax. It’s currently unclear whether this same rule will apply with related employers (both those that participate in the plan and those that don't).
Lastly, the IRS is requesting comment on whether a plan should be able to prohibit affected participants from making catch-up contributions under the plan. This would seem to violate the current regulatory requirement that catch-up contributions be uniformly available; however, the IRS inquiry appears to be looking for guidance on how to address the challenges of adding Roth to a plan that have been raised by plan sponsors of all types of plans (single employer, multiple employer, multiemployer, and governmental 457(b) plans).
To download our SECURE 2.0 white paper and view our other helpful resources, please visit our SECURE 2.0 resource page.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.
MGTS-PS 502104-GE 08/23 502104