FLASHPOINT: The Latest and Greatest on Catch-up Contributions

By: Alison J. Cohen, Esq.

The Treasury released proposed regulations on January 10, 2025 (“Catch-up Prop. Reg.”), regarding the changes to catch-up contributions under the SECURE 2.0 Act of 2022 (“SECURE 2.0”).  SECURE 2.0 amended Internal Revenue Code (“Code”) §414(v) to both increase the catch-up limitation for participants ages 60-63 (“60-63 Catch-up”) and add the requirement for certain participants to fund catch-ups as designated Roth contributions (“Roth Catch-up”). The Catch-up Prop. Reg. also addresses increases in catch-up contributions for certain small SIMPLE plans, but we will not address that in this Flashpoint as it was covered in a prior release.

The Catch-up Prop. Reg. will not be effective until taxable years that begin more than six months after the date it is issued in final form. This means that, even if the IRS is at its most efficient and produces the final regulations later this year, the Catch-up Prop. Reg. won’t take effect until the calendar year starting January 1, 2027. Taxpayers may rely on the Catch-up Prop. Reg. for purposes of the 60-63 Catch-up immediately. We’ll discuss this in further detail later on.

FAQs for Understanding the Roth Catch-up Requirements

What is the new Roth Catch-up requirement as outlined in SECURE 2.0?

SECURE 2.0 §603 mandated that catch-up contributions of individuals earning more than $145,000 (as adjusted in years starting with 2025) in FICA wages in the prior year must be in the form of designated Roth contributions (“Roth”). We will refer to these individuals as “higher-paid individuals” or “HPIs” in this discussion. (Yes, it would have been lovely had Congress used the definition of Highly Compensated Employees for this purpose so there wouldn’t be yet another limit to monitor.)

We previously wrote a Flashpoint about the new requirement to have certain catch-up contributions funded as Roth and the delay of implementation by the IRS in Notice 2023-62 through the implementation of an Administrative Transition Period. This Administrative Transition Period pushed the effective date of this provision to January 1, 2026, which allowed the IRS time to write the Catch-up Prop. Reg.

Does this mean that all plans with catch-up contributions have to add Roth?

No. Plan Sponsors that do not want to add Roth to their plan do not need to remove catch-up contributions. However, only non-HPIs would be permitted to make catch-up contributions under such plan. This means that Plan Sponsors will need to monitor who is an HPI and ensure that they are not permitted to defer more than the Code §402(g) limitation.  The additional work that this might entail for a Plan Sponsor, and the increased likelihood that a mistake will be made, may make this option less pleasant than it appears. It would also mean, for example, that if a failed ADP test would result in elective deferrals being distributed to an HPI who is an HCE, there would not be an option to recharacterize those deferrals as catch-up contributions. Effectively, it would mean that HPIs would be treated as though they were not catch-up eligible.

Plan Sponsors that want to keep catch-up contributions available for all their participants will need to ensure that their Plan permits Roth deferrals (and amend it to do so, if it does not already so permit). The Catch-up Prop. Reg. makes clear that the addition of Roth may not apply only to just catch-up contributions. All participants, including non-HPIs, must be permitted to make Roth deferrals, even if they are not catch-up contributions.

If you think about it, this policy decision shouldn’t come as a surprise. We know that Congress wants to raise revenue. If more plans are forced to offer Roth, more participants may elect to defer on a Roth basis, which will result in more immediate taxable income than if they made pre-tax deferrals. (Don’t use logic and point out that this means that the government won’t get tax revenues later on from distributions. Congress judges revenue based on a limited time frame, and what happens “later on” is less relevant to them.)

Must an HPI affirmatively elect to have catch-up contributions be treated as Roth?

No. A plan can provide that, in the absence of an affirmative election to the contrary, HPI participants will be deemed to have irrevocably elected that their catch-up contributions be Roth. However, a participant must have an effective opportunity to opt out of this deemed election and, instead, have their deferrals stop when the applicable limit is reached.

The beauty of this approach is that it simplifies administration, particularly since neither the plan nor the participant may know at the time a deferral is made that it will be a catch-up. Deferrals are often recharacterized as catch-ups after they were contributed because of §415 or ADP test failures.

Example: Ruth (54), an HPI who is also an HCE, makes $15,000 of pre-tax deferrals in 2028, well within the §402(g) limit. The plan fails the ADP test and would distribute $3,000 of excess contributions to Ruth to correct the failure if she were not catch-up eligible. With the default Roth election in place, the plan administrator is able to perform an in-plan Roth rollover of the excess so that it may be recharacterized as a catch-up and retained in the plan.

There is a catch (pardon the pun) to this approach. When Ruth made her deferrals, they were treated as pre-tax, and deposited to her pre-tax deferral account, not her Roth account. This violates both the regular rules for handling Roth deferrals and the required payroll reporting of those deferrals. The Catch-Up Prop. Reg. offers three approaches to handling this problem:

Option 1, W-2: If the employer has not yet issued Ruth’s 2028 Form W-2, the employer can move the excess contributions plus earnings to Ruth’s Roth account in the plan and reflect the Roth status of the deferrals on her Form W-2 by including them (but not the earnings) in her taxable wages.

Option 2, In-plan Roth rollover: The plan can do an in-plan Roth rollover of Ruth’s excess contributions, plus earnings, and reflect the full amount of that rollover (including the earnings) on a Form 1099-R for the year in which the rollover is completed (presumably 2029 in this example). However, this option has strict deadlines. §402(g) /§401(a)(30) catch-ups must be corrected by April 15. ADP catch-ups must be corrected within 2½ months after the end of the plan year unless the plan is a EACA entitled to a 6-month correction period.  §415 catch-ups must be corrected within 30 days of the extended tax filing deadline. It is not yet clear if a failure to meet these deadlines may be self-corrected under EPCRS or if the normal 12-month period after the year for which an ADP test is performed can be used for correction, subject to the payment of the 10% excise tax under Code §4979. The Catch-up Prop. Reg. is oddly silent on both of these issues. It would be strangely contrary to all the other normal correction processes triggered by missed deadlines, i.e., ADP, -11(g) amendments, and the like. Hopefully, the closely awaited EPCRS revision will answer these questions, but this should be mentioned in a comment letter to the IRS regarding the Catch-up Prop. Reg.

Option 3, Distribution: The correction of last resort – which is mandatory if the IRS decides that EPCRS is unavailable for this purpose once the timing deadlines discussed above are missed – is that the plan distributes the excess to the participant as though the participant was not catch-up eligible. This option applies if (1) the plan does not have practices and procedures in place, as discussed below; (2) the participant elects out of the deemed Roth treatment; or, possibly, (3) the plan misses the correction deadlines of the first two options.

Is there an obligation for the Plan Sponsor to notify the HPI about the change to Roth?

Unclear. The only potential issue here is that the Catch-up Prop. Reg. also requires that plans permit an HPI to elect to cease elective deferrals once they hit the deferral limit to avoid triggering the Roth Catch-up. What does this mean, practically speaking? In particular, what is the timing for such an election? Does a Plan Sponsor have to take extra steps to approach the participant immediately before a limit is reached (an administrative challenge) to give them the chance to stop deferrals? Given that most plans permit deferral elections to be dropped to zero at any time, a plan provision deeming the participant to have elected to stop deferrals rather than the automatic conversion to Roth may be an alternate solution. Or, perhaps, the Plan Sponsor can and should provide such an election to any HPI at the beginning of the year, in case they happen to exceed a limit during the year. We can hope that this process is clarified with the final regulations.

Which participants must comply with this?

Any catch-up eligible participant whose FICA wages for the preceding calendar year from the Plan Sponsor exceeded $145,000 is required to comply with the Roth Catch-up requirements.  Therefore, if a participant’s FICA wages in 2025 were over the limit, the participant’s 2026 catch-ups must be Roth. Because of the Administrative Transition Period, prior years are not subject to this rule.

How is the $145,000 determined?

The Catch-up Prop. Reg. define FICA wages based on Social Security tax wages for the tax year (Box 3 on Form W-2). Therefore, if the participant doesn’t have any FICA wages, such as a partner with only self-employment income or certain state or local governmental employees, they would not be an HPI and would not be limited to making catch-up contribution as Roth.  The Catch-up Prop. Reg. reminds us that FICA wages on Box 3 of the Form W-2 may differ from wages on Box 1, the number we normally use to compute plan compensation. For example, vested deferred compensation is taxable for FICA, but tax is delayed for normal income taxes.

Starting for taxable years beginning after December 31, 2024, the Roth Catch-up threshold will be subject to possible cost of living adjustments. So, don’t get too attached to the $145,000 amount.

Is the $145,000 based on only compensation earned with the current employer or is it determined by individual?

For purposes of determining the preceding year’s FICA wages, only wages earned from the employer sponsoring the plan would be considered. This means that, if an executive changes jobs mid-year, only the compensation earned with the Employer that sponsors the plan would be considered for determining HPI status.

Say, for example, Polly is hired in October 2028 at a salary of $300,000. She will have earned only $75,000 by the end of 2028. Polly would not be an HPI for either 2028 or 2029, because she did not exceed the $145,000 limit in the two look-back years, i.e., 2027 and 2028. She would become an HPI for 2029.

Further good news here. There is no requirement to prorate the $145,000 if an employee is hired mid-year.  Since this is a lookback determination, this means that an executive hired at a salary of $300,000 as of October 1 would only have $75,000 of FICA compensation in their first year. For the first 15 months of employment, the executive would not need to make Roth Catch-up contributions.

What if the Plan Sponsor is a member of a controlled or affiliated service group?

This is an interesting outcome in the Catch-up Prop. Reg. The “employer sponsoring the plan” would not include any other entities, even those that are part of a controlled or affiliated service group.  This is true even if all members of the controlled or affiliated service group have adopted the same plan.

For example, the Waffle 401(k) Plan is sponsored by Waffle Home, Inc. It is in a controlled group with the Pancake Home and Crepe House. Both Pancake and Crepe are adopting employers of the Waffle 401(k) Plan.  Mabel works for Waffle Home, and also for Crepe House, earning $100,000 at each entity. Based on the language in the Catch-up Prop. Reg., Mabel would not be considered an HPI for Roth Catch-up purposes.

Could controlled or affiliated service group entities avoid the Roth Catch-up by splitting compensation up, like Mabel? It would be the tail wagging the dog, but it would appear to be a way around the Roth Catch-up, if the plan sponsor wanted to.

If a plan participant earned more than $145,000 working for one participating employer in the plan but less for another, catch-up contributions relating to deferrals from paychecks issued by the first employer would need to be Roth, whereas catch-ups relating to other employer would not.  This should be an interesting administrative challenge.

What if the participant is part of an MEP/PEP or Multiemployer plan?

Along the same lines as the controlled or affiliated service group rules, participants working for more than one employer that are sponsors of a MEP/PEP or Multiemployer Plan would not have their wages aggregated to determine HPI status.

For example, Cats, Inc. and Dogs Corp. are unrelated entities.  They both participate in the Pets Multiple Employer Plan. Fido works for both Cats, Inc. and Dogs Corp. as Chief Flea Catcher, making $75,000 with each entity.  Fido would not have to have his catch-up contributions treated as Roth since he would not be considered an HPI.

Does a participant have to wait until they hit a limit to make Roth Catch-up contributions?

The limit under Code §401(a)(30) is based on a calendar year.  So, for an off-calendar year plan, I hope that those plan sponsors have learned by now to monitor when elective deferrals reach the deferral limits.  Only elective deferrals that are made after reaching the deferral limit would be considered catch-up contributions.

The Catch-up Prop. Reg. takes an interesting interpretive turn from prior guidance.  To ease administrative burdens on plan sponsors, even though a participant has not reached a deferral limit, if the participant made Roth contributions at some point, they can be counted toward the Roth Catch-up requirement.

Here is how this could work using a calendar year for ease of understanding. Olivia makes Roth contributions from January through May in the amount of $7,500. She then continues to contribute, but as pre-tax deferrals for the remainder of the year, for another $23,000.  At the end of the year, Olivia has $23,000 in pre-tax deferrals and $7,500 as Roth.  Even though the $7,500 in Roth went into the plan before the deferral limit was reached, these amounts can still be considered to be the Roth Catch-up contribution, assuming that Olivia is an HPI.

How does this all reconcile with the universal availability requirement?

Concerned about that pesky universal availability requirement and nondiscrimination requirements under Code §401(a)(4)?  Don’t fret. The IRS answered this question by adding language to the proposed Treas. Reg. §1.414(v)-1(e)(1)(iii) that bypasses these rules.  So, whether or not a plan has added the Roth Catch-up, it will be deemed to pass and satisfy all requirements. The preamble to the regulation explains that, for universal availability, all that is needed is for each participant to be permitted to make catch-up contributions up to their applicable limit. If the limit for an employee is $0, because they are an HPI and the plan does not permit Roth contributions, so be it.

To take advantage of the ability to correct, what must a Plan Sponsor do/have?

While practices and procedures (“P&P”) intended to aid in compliance aren’t something new (EPCRS has required them for years), the language of the Catch-up Prop. Reg. specifically mandates that the plan sponsor or plan administrator have P&Ps directed specifically to ensure compliance with the Roth Catch-up requirements. Here’s the part of the language that raised our eyebrows.  These P&Ps have to be in place “at the time an elective deferral is made.” This means that all plans that intend to provide for Roth Catch-up contributions need to adopt these P&Ps before this requirement takes effect if they want to be in a position to correct any errors that may arise. Those procedures must include the plan treating HPIs as having elected that their catch-ups will be Roth, unless they opt out.

A failure to have the P&Ps means that the only correction available is to refund excess deferrals.

Exceptions to the P&Ps requirement include when the Roth Catch-up is triggered either because of an employer-provided limit or an ADP testing failure. This is because these are not determined until after the last day of the plan year in which the deferral was made. Nonetheless, we recommend that you not tempt fate:  get the P&Ps in place.

The 60-63 Catch-up

In November 2024, we published a Flashpoint outlining the details of the SECURE 2.0 Section §109 addition of an additional catch-up contribution available to participants ages 60-63. This bump applies to both 401(k) and 403(b) plans that permit catch-up contribution, as well as SIMPLE arrangements.

The participant would be entitled to make these additional catch-up amounts starting for the taxable year in which they will attain age 60, and it would stop as of the taxable year in which they will attain age 64.  For off-calendar year plans, this may present an additional challenge in monitoring when to allow the additional amounts and how to communicate this to the participant.

One important point the Catch-up Prop. Reg. made clear is that this is not something that a Plan Sponsor needs to elect to include in the plan. However, if a Plan Sponsor chooses not to offer this additional limit, the same way it can choose to elect a lower overall catch-up limit, it will need to make an election to do so.

Something the Catch-up Prop. Reg. didn’t address is whether long-term, part-time employees (“LTPTs”) are eligible to make these additional contributions, as it was addressed in the LTPT Guidance. In our November Flashpoint, we surmised that it should be made available to LTPTs, but if the Plan Sponsor opts out of nondiscrimination testing for LTPTs, they don’t have to be given that right. Practically speaking, however, operating a plan with different rules for different portions of the employee population is incredibly challenging and prone to mistakes.  For simplicity’s sake, it is likely better to just have Roth available for everyone.

Impact on Puerto Rico Dual-Eligibility Plans

Throughout the Catch-up Prop. Reg. are little nuggets for how these rules impact the Puerto Rican employees covered by dual eligibility plans.

Nugget #1 – The fact that the 60-63 Catch up isn’t applicable to Puerto Rican participants because such provision isn’t contained in the Puerto Rico Internal Revenue Code (“PRIRC”) of 2011 won’t be considered a violation of the universal availability rule.

Nugget #2 – The PRIRC doesn’t allow for Roth contributions, but it does permit after-tax contributions. Therefore, any Puerto Rican participant would need to be given the opportunity to make catch-up contributions as after-tax.  But, otherwise, this will not cause a violation of the universal availability rule.

Nugget #3 – The PRIRC imposes a lower catch-up limit, currently $1,500. The plan can enforce that limit on Puerto Rican participants without violating universal availability.

Determining the Effective Date

As discussed above in the Roth Catch-up Contribution section, the IRS provided for an Administrative Transition Period that pushed the implementation of Roth Catch-up until January 1, 2026. In the Catch-up Prop. Reg., for most plans, the timing for the proposed amendments wouldn’t be until the start of the taxable year after 6 months following the release of the Final Regulations.  For those of you that hate math word problems, if these proposed regulations are finalized in November 2025 (which would be a miracle), then the effective date would be January 1, 2027. This does not mean that plan sponsors won’t need to start tracking HPIs and require Roth Catch-ups starting in 2026.  It just means that they will be doing so without a proverbial net.

That said, the IRS specifically carved out the increased catch-up provisions and taxpayers may elect to apply the proposed regulations as of the taxable years beginning after December 31, 2024, for the 60-63 Catch-up, and as of the taxable years beginning after December 31, 2023, for the SIMPLE increased catch-up.  (Of course, as we noted in our earlier Flashpoint on the SIMPLE changes, the IRS botched the ability for SIMPLE sponsors to use the increased amounts in 2024 by failing to provide guidance in time for the annual notice to be timely distributed.)

Multiemployer (union) plan advocates won a major victory here.  Because of the challenges of updating collective bargaining agreements (“CBA”), there is a delayed effective date.  For these plans, the proposed amendments to §1.414(v) would apply as of the taxable years beginning after the later of the first taxable year after 6 months following the release of the Final Regulations (per above – maybe January 1, 2027) or the first taxable year that begins after the date on which the last CBA related to the plan as in effect on December 31, 2025, terminates.

Notwithstanding the delayed effective date for the Catch-up Prop. Reg., a good faith, reasonable interpretation of the law applies in the interim, and it is likely that following the regulation is the best approach for meeting that standard in relation to the Roth catch-up obligation.  Therefore, Plan Sponsors should consider acting as if the regulation is effective in 2026.

Conclusion

Comments on the Catch-up Prop. Reg. are due to the IRS by March 14, 2025, and hearings will be held April 7, 2025.  There are certainly a lot of questions still left open after this proposed regulation, so we at FBLC will be submitting a letter.  If you have specific concerns that you would like us to relay, please let us know.

Our newest associate, Morgan K. Baumgard, will join Derrin Watson and me for an ERISApedia webcast on catch-up February 13, 2025.  You can register here.

Come and visit the entire Ferenczy Nerd Herd at our Pensions on Peachtree Conference held here in Atlanta April 24-25, 2025.  We can’t wait to be your ERISA (conference) Solution!