By: Alison J. Cohen, Esq.

The SECURE 2.0 Act of 2022 (“SECURE 2.0”) included a number of provisions that had a delayed effective date.  One such provision was SECURE 2.0 section 109, which contained one of two changes to the catch-up contribution provisions under Internal Revenue Code (the “Code”) section 414(v)(2).  Section 109 contains an increase in the limit on catch-up contributions, which will take effect as of tax years starting on or after January 1, 2025.  With the recent release of the 2025 cost of living adjustments (“COLAs”) coming out, it seemed appropriate to highlight this portion of SECURE 2.0 at this time.

The second catch-up provision was a requirement that all catch-up contributions made by employees with more than $145,000 in FICA wages would need to be funded in the form of a Roth Contribution.  This provision was originally supposed to take effect as of the tax year starting January 1, 2024. However, the Internal Revenue Service (“IRS”) delayed the implementation of this provision until January 1, 2026, to give it time to issue guidance.  More to come next year (we hope).  In the meantime, catch-up contributions do not need to be Roth amounts, even for higher-paid employees.

Increased Savings for Participants Between Ages 60-63

Notwithstanding the fact that SECURE 2.0 gave the IRS 2 years between the enactment of Section 109 and its effective date in 2025, the IRS has yet to issue any guidance explaining how the new limits should be administered.  Therefore, even though the law permits this provision to be effective for 2025, there are some concerns with making this available to participants at this time.  Further, it’s possible that payroll systems won’t be ready to properly calculate these increased limits in 2025.  As a result, employers should carefully consider whether they should implement this increase as the new year begins.

At its core, this new catch-up limitation applies to participants who are between ages 60 and 63 as of the end of 2025 (and subsequent years).  In a traditional 401(k) plan, the new rule permits these individuals to make catch-up contributions of up to the greater of $10,000 or 150% of the normal catch-up limitation in place for that year.  For example, for 2025, the increased limit would be $11,250 – or $3,750 more than the $7,500 catch-up available for other eligible participants.  In a SIMPLE Plan, the adjusted catch-up limitation will be the greater of $5,000 or 150% of the catch-up limitation in place for that year, or $5,250 for 2025 ($1,750 more than the $3,500 amount available for other eligible participants).

Example: Mary and Joe both work for the same company, which sponsors a 401(k) plan.  Mary’s 60^th birthday is October 2, 2025.  Mary can elect to make catch-up contributions to her employer’s 401(k) plan in 2025 in the amount of $11,250.  When added to the normal salary deferral limit for 2025 of $23,500, Mary can have total salary deferrals of $34,750.

Joe, on the other hand, will celebrate his 64^th birthday on October 2, 2025.  Because he will be age 64 (i.e., older than 63) at the end of 2025, he is not eligible for the increased catch-up limit.  Therefore, the maximum salary deferrals for him in 2025 will be the normal deferral limit for that year of $23,500, plus the regular catch-up contribution limit of $7,500, for a total of $31,000.

Must Long-Term, Part-Time Employees Be Permitted to Make Catch-up Contributions?

In 2024, the new long-term, part-time (LTPT) employee rules became effective, requiring plans to permit their employees who worked between 500 and 1,000 hours in three consecutive years to make salary deferrals to their 401(k) plans. (In 2025, this service period gets reduced to two consecutive years.) One question that arose regarding LTPT employees is whether they, too, must be offered the opportunity to make catch-up contributions.  The LTPT proposed regulations clarified that if a plan sponsor is electing to exclude the LTPT from nondiscrimination testing, it may also exclude them from catch-up contributions, including this boosted amount.  However, when we have discussed this with our clients, both plan sponsors and service providers, there appears to be a consensus that excluding the LTPT employees from catch-up contributions is not a good idea.  Doing so would create an additional, unnecessary administrative complication which is another opportunity to make errors.

Therefore, if a plan sponsor allows catch-up contributions for LTPT employees, it makes the most sense to include this boosted limit for LTPTs between age 60 and 63.

What if the IRS Releases Guidance Later in 2025?

Just because the IRS may not have issued guidance by January 2025, doesn’t mean that plan sponsors won’t be able to elect to make this available before the end of the 2025 Plan year.  It is important to remember that a participant isn’t eligible to make catch-up contributions until they have first hit a limit or restriction on their regular deferrals, such as the normal legal limit on deferrals ($23,500 in 2025), the limit under the ADP test (i.e., the participant is a highly compensated employee whose deferrals are further limited because of the nondiscrimination testing), or a limitation imposed on participants through the plan document.  Therefore, whether the plan does or does not permit catch-up contributions isn’t really important until later in the year.  For that reason, a plan sponsor who is concerned about having all necessary guidance in place before committing to making this change to the plan may wait to see if the IRS has published its rules during the year, and then implement the increased limit.

Whenever the plan sponsor decides that it wants to implement this new catch-up contribution limitation during 2025, it makes sense to do so only if they have checked first with their payroll provider, third party administrator, and recordkeeper to ensure that the required programming is in place.  If not, they can delay implementing this provision until the service providers are ready to support it, or they can work with the providers to determine reasonable, manual workarounds to monitor the limitations.

Timing of Amendment

This, like other options that can be elected by the plan sponsor under SECURE 2.0, will not need to be documented in the plan until 2026, based on the guidance provided in Notice 2024-02.  However, it is critical that plan sponsors and their service providers maintain a checklist of all SECURE and SECURE 2.0 provisions it has elected to implement, so that the 2026 document will be accurate.  And, if the plan sponsor decides to change service providers before the new document is adopted, it will be especially important to confirm all possible elections as part of the transition.

Do you have questions on catch-up contributions or other retirement plan issues?  Give us a call.  After all, we are your ERISA solution!

If you are a retirement plan practitioner, be sure to check out Ilene, Alison, Derrin, and the Ferenczy Players when we perform our Ethics magic on ERISApedia on December 3, 2024.  Two hours of ethics continuing education in a fun and informative session!  Go to www. Erisapedia.com to register.