SECURE 2.0 - Roth Catch-Ups – What We Don’t Know That We Need to Know
Under the SECURE 2.0 Act (Division T of the Consolidated Appropriations Act, 2023), employers that maintain 401(k) plans that permit catch-up contributions will be required to mandate that certain employees who earned more than $145,000 in the prior calendar year from the employer sponsoring the plan make catch-up contributions solely on a Roth (after-tax) basis. This requirement takes effect Jan. 1, 2024. Seems simple, right? Without more guidance from the IRS, it most certainly is not simple. See below for some of the questions being raised, some of the answers that we know and some open issues that make it difficult to proceed with implementation of this new requirement.
Refresher on Catch-Up Contributions: Employers can offer 401(k) plan participants who are age 50 or older the opportunity to defer additional compensation to their retirement accounts (more than the Code Section 402(g) amount, which is $22,500 for 2023). The catch-up contribution limit for 2023 is $7,500.
Can the employer just amend the plan to prohibit employees who earned more than $145,000 in the prior year from making any catch-up contributions?
No, not unless the employer removes the ability to make any catch-up contributions to the plan for all participants.
Can the employer amend the plan to require all participants, regardless of the amount of compensation earned in the prior year, to make catch-up contributions on a Roth (after-tax) basis?
Good question. Likely no, but clear rules would be nice.
How is compensation for the prior year determined?
The statute specifies use of the Code Section 3121(a) definition of compensation, which is essentially, all pay for employment, including the cash value of all compensation (including benefits) paid in any medium other than cash. However, there are very specific exceptions. This looks like it should be as simple as using the Box 3 wages from the W-2 for the prior year (i.e., FICA wages), without the Social Security wage cap. Additional guidance would be appreciated.
How will mid-year hires be handled?
In this case, there is no prior year compensation from the employer sponsoring the plan. Therefore, does this participant earning more than $145,000 get a pass on the requirement for the first year of employment? It would seem that is the case.
What if the prior year’s employment is less than a full year? Is there an annualization concept?
Or is it literally the actual Section 3121(a) wages for the prior year paid by the employer sponsoring the plan?
Plan recordkeepers are raising alarms that without clear guidance, implementation for 2024 will not be possible, and are pushing for a delayed effective date. Regardless of these open issues, all plan sponsor employers should be engaging in conversation with their recordkeepers and outside counsel to determine information coordination and begin planning for compliance.