SECURE 2.0 Roth Catch-Up Requirement

Published Aug. 10, 2023. Updated Aug. 31.

When reviewing current employee benefit plans, employers should consider their approach to one of the most challenging new rules of the SECURE 2.0 Act for most types of defined contributions plans, such as 401(k) plans.

Under SECURE 2.0, for all plan years beginning after Dec. 31, 2025, employees who received annual compensation of $145,000 or more from their employer during the prior year may only make catch-up contributions on a Roth (after-tax) basis – known as the Roth Rule.

Because the IRS has yet to issue guidance on the Roth Rule, there remain a host of unresolved issues regarding proper implementation and administration. As a threshold matter, however, you should understand how the rule may affect your plan. Consider the questions below to evaluate if and how to amend the terms of your plan to account for the Roth Rule.  

1. Does your plan allow for catch-up contributions? If permitted under the terms of their plan, individuals who have attained age 50 may make additional employee elective contributions – called “catch-up contributions” – in excess of the annual contribution limit set by the IRS. The Roth Rule only affects catch-up contributions, so if your plan does not allow for such contributions, you do not need to consider the Roth Rule unless/until your plan is amended to permit catch-up contributions. If your plan already allows for catch-up contributions, consider (2) and (3) below.
2. Does your plan allow for Roth contributions? If your plan permits catch-up contributions but does not allow for Roth contributions, to comply with the Roth Rule, you will need to (i) work with your third-party administrator (TPA) to add Roth accounts to your plan and (ii) ensure your payroll provider and TPA are able to collaborate to administer Roth contributions and accounts.
3. Are your service providers able to track the amount of plan participants’ prior year compensation? To allow individuals affected by the Roth Rule to make catch-up contributions to your plan, your TPA and payroll provider must know which participants received annual compensation of $145,000 or more from the employer during the prior year. In this context, “compensation” is defined by section 3121(a) of the Internal Revenue Code and essentially means FICA wages without the Social Security wage cap.
   
   Check the definition of “compensation” under your plan – it is likely different from the definition adopted by the Roth Rule. In such case, complying with the Roth Rule will require you to develop a process by which to track two types of compensation for each participant: compensation as defined by your plan and compensation as defined by the Roth Rule. Contact your service providers to learn if and how they are able to track participants’ Roth Rule compensation and tag participants’ catch-up accounts in connection with such compensation.

SECURE 2.0 initially required plan sponsors to comply with the Roth Rule for plan years beginning after Jan. 1, 2024.[1] However, plan sponsors face a myriad of administrative difficulties in implementing the Roth Rule, including, given the lack of IRS guidance, uncertainty about how they may and may not comply with the rule. In recognition of these difficulties, the newly announced transition period delays the effective date of the Roth Rule by two years, until Jan. 1, 2026.

The transition period means that, for plan years 2024 and 2025, no plan participants are required to make catch-up contributions on a Roth basis. Until 2026, plan sponsors may continue to allow all participants who are eligible to make catch-up contributions (i.e., who are age 50 or older) to make such contributions on either a pre-tax or Roth basis.

Due to IRS aggregation rules, if one plan of an employer permits catch-up contributions, all plans of that employer must permit catch-up contributions. This means that, if you maintain multiple plans and you are not prepared to comply with the Roth Rule in connection with any one of those plans, you should eliminate catch-up contributions from all of your plans.

Currently, there is no clear way for employers to simplify their administration of the Roth Rule. Under the terms of the rule, it is not permissible for an employer to eliminate catch-up contributions only for participants who received compensation of $145,000 or more from the employer during the prior year, while allowing catch-up contributions for other participants. In addition, until the IRS publishes guidance to the contrary, it is likely not permissible for an employer to require all participants (regardless of their annual compensation) to make catch-up contributions on a Roth basis.

Remember: However you respond to the Roth Rule – whether you implement its terms or eliminate catch-up contributions – make sure to amend the terms of your plan document and summary plan description as needed to accurately reflect the administration and operation of your plan.

To learn more or to discuss your implementation of the Roth Rule, please contact a member of our Employee Benefits team.

[1] The original version of this article was published when the Roth Rule implementation date was Jan. 1, 2024. We updated the article to reflect the IRS announcement that delays the transition period to Jan. 1, 2026.