SECURE 2.0 | Roth and Catch-Up Contributions

SECURE 2.0 | Roth and Catch-Up Contributions

SECURE 2.0 transformed the retirement plan landscape, leaving virtually no stone unturned in its search for tax revenue. Consequently, catch-up contributions were not unscathed. Effective 2024, SECURE 2.0 requires participants who earned more than $145,000 in FICA wages (as will be adjusted in the future for inflation) during the immediately preceding calendar year contribute catch-up contributions on a Roth basis. Previously, catch-up eligible Participants could elect either pre-tax or Roth catch-up contributions (if the Plan Document supports Roth). 

Affected employees are employees whose FICA wages from the Employer in the prior calendar year exceed $145,000. Therefore, affected employees may differ from the Plan’s definition of Highly Compensated Employees (HCE) and Non-Highly Compensated Employee (NHCE) used in annual non-discrimination testing. 
For example, a 100% Owner of the Company is considered HCE; however, if that Owner’s prior calendar year FICA wages were less than $145,000, the Owner would not be required to make Roth catch-up contributions. Similarly, an employee who earns $148,000 in calendar year 2023 may be considered NHCE during 2024 non-discrimination testing but would be required to make Roth catch-up contributions. (Note, as the law is currently written, self-employed individuals appear to be exempt from this particular provision, as self-employed individuals are not subject to FICA taxes).

If your 401(k) Plan currently allows both catch-up contributions and Roth Deferrals, please work with your payroll vendor and record-keeper to identify affected individuals and communicate the new Roth catch-up requirements.
If your 401(k) Plan currently allows for catch-up contributions, but does not offer Roth, the Plan Sponsor will need to amend the plan to remove catch-up contributions entirely or amend the plan to allow Roth contributions for all employees. Payroll vendors, record-keepers and plan participants will need to be notified of the amendment.

While we recognize there are numerous administrative hurdles to overcome (coordinating payroll systems with record-keeper systems, communication to plan participants, identification of affected employees), unless Congress delays the Roth catch-up rule or the IRS provides temporary relief, Plans need to be prepared to implement the new catch-up requirements in 2024.