On January 10, 2025, the Internal Revenue Service (IRS) issued proposed regulations that provide guidance on age-based catch-up contributions for retirement plans. Under Internal Revenue Code (Code) Section 414(v), plans may (but are not required to) allow participants in 401(k) plans who are aged 50 or older to make “catch-up” contributions to their plan accounts that are in addition to regular deferrals. These age 50 catch-up contributions may be made regardless of any other limits imposed on elective deferrals under the Code. The proposed regulations reflect statutory changes made by Sections 603 and 109 of the SECURE 2.0 Act of 2022, and affect retirement plan participants, beneficiaries, employers, and administrators.
Roth Catch-Up Contribution Requirements Under SECURE 2.0 Begin in 2026
Prior to 2026, catch-up contributions may be made on a pre-tax basis from an eligible participant’s compensation. They also may be made on a Roth (post-tax) basis if Roth contributions are allowed under the retirement plan. However, Section 603 of the SECURE 2.0 Act amends Code Section 414(v) to provide that if a participant’s FICA wages from the prior calendar year from the employer sponsoring the plan exceed $145,000 (indexed after 2024) (a “High Earner”), their age 50 catch-up contributions must be designated as Roth contributions. The proposed regulations provide the following helpful guidance and clarifications relating to this new rule:
- The proposed regulations clarify that the Roth catch-up requirements apply only to a High Earner’s FICA wages from the employer sponsoring the plan. For this purpose, the “employer sponsoring the plan” refers to the participant’s common-law employer, without regard to the controlled group rules.
- The proposed regulations confirm that plans cannot require all participants to make catch-up contributions on a Roth basis, an approach which could simplify plan administration. Rather, plan participants earning $145,000 or less (indexed) must still have the option of making traditional pre-tax catch-up contributions.
- The proposed regulations will permit plans to treat a participant’s pre-tax election as a deemed Roth election if the participant is a High Earner (and therefore subject to the Roth catch-up requirement), so long as the plan allows for a subsequent election to change deferral elections. For example, a plan would need to permit a High Earner the opportunity to stop making additional elective deferrals.
- The proposed regulations do not require a plan to include a Roth contribution program. If a plan does not include a Roth contribution program, then a High Earner subject to the Roth catch-up rule would be prohibited from making catch-up contributions under the plan. A participant who is not subject to the Roth catch-up rule would not be affected and could make catch-up contributions under the plan on a pre-tax basis. However, if any participants are allowed to make catch-up contributions on a Roth basis, then all other participants in the plan must also be given the option to make catch-up contributions on a Roth basis.
- As the IRS indicated in prior guidance under Notice 2023-62, the proposed regulations confirm that the Roth catch-up requirement does not apply to any participant who does not have FICA wages for the preceding calendar year from the employer sponsoring the plan, including self-employed individuals such as partners.
- The proposed regulations clarify that the participant’s Roth catch-up FICA wage threshold is not prorated for the first year of employment. A participant who worked for an employer for only part of the previous year must meet the full Roth catch-up FICA wage threshold to be subject to the Roth catch-up requirements in the current year.
- The proposed regulations provide correction methods for plans that fail to satisfy the Roth catch-up requirement, including Form W-2 corrections and in-plan Roth rollovers. The correction methods have deadlines consistent with other deadlines for correcting contribution errors. To take advantage of the new correction methods, plans must have procedures in place to govern compliance with the Roth catch-up rule, incorporate the new correction methods under the plan, and adopt a deemed Roth election provision.
While the statutory requirements take effect for taxable years beginning after December 31, 2023, the deadline for compliance with the Roth catch-up requirements is postponed to 2026 due to its administrative complexity. Plans are permitted to apply the proposed regulations in the meantime, and the IRS has designated 2024 and 2025 as an administrative transition period. The proposed regulations, when finalized, will apply to contributions made in taxable years beginning more than six months after the date that the final regulations are issued. There is also a special rule for collectively bargained plans.
Optional Higher Catch-up Limits for Participants Aged 60 to 63 Begin in 2025
SECURE 2.0 increased the catch-up limit for the years in which the participant attains age 60, 61, 62, and 63. The increased limit is the greater of $10,000 (indexed) or an amount equal to 150% of the normal catch-up limit for 2024.
The proposed regulations outline the specific dollar amounts for increased catch-up limits. The cost-of-living adjustments for each limit are also addressed. Specifically, beginning January 2025, if authorized by the plan, participants aged 60 to 63 can contribute up to $11,250, which is 150% of the 2024 age 50 catch-up limit (150% of $7,500), with cost-of-living adjustments made for years after 2025. Starting with the year in which the participant turns 64, the limit reverts to the standard catch-up amount. Different limits apply to SIMPLE IRAs.
The proposed regulations confirm that offering the increased catch-up limit is optional. A plan may be designed to limit the catch-up contributions for participants aged 60 to 63 to the same applicable dollar catch-up limit that applies for all other catch-up eligible participants. Plans are permitted to apply these rules for taxable years beginning after December 31, 2024.
What’s Next?
To prepare for these changes, plan sponsors should take the following next steps:
- Consider any necessary plan design and/or operational changes to address the proposed
regulations; - Consult with the plan administrator and recordkeeper to confirm any required
administrative updates (e.g., update payroll systems); and - Consult with benefits counsel to discuss any questions regarding implementation and
required plan amendments.
For more information about how these proposed regulations may affect your qualified retirement plan(s), please contact any member of Ice Miller’s Workplace Solutions Practice Group.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.