The IRS this past Friday issued proposed regulations regarding mandatory Roth catch-up contributions. SECURE 2.0 amended the catch-up contribution provisions of the Code. The Act provided that, beginning in 2024, individuals eligible to make catch-up contributions who made over $145,000 (indexed in future years) in wages in the previous year must designate catch-up contributions as Roth contributions (i.e., such individuals can no longer designate catch-up contributions as pre-tax contributions). As outlined in our previous blog post, the IRS issued guidance that delayed the implementation of mandatory catch-up contributions from 2024 to 2026. The proposed regulations provide insight on some of the big questions the benefits community was asking about the mandatory Roth catch-up provision.
What wages are applicable to the $145,000 limit?
The proposed regulations provide that the mandatory Roth catch-up provision will apply to a catch-up eligible participant that had FICA wages for the preceding calendar year from the employer sponsoring the plan that exceed $145,000 (subject to COLA adjustments). The IRS has confirmed in the regulations that individuals who do not have any FICA wages from the employer (e.g., a partner that only has self-employment income) would not be subject to the Roth requirement. Similarly, individuals who have no income from the employer sponsoring the plan for the preceding calendar year (e.g., new hires) would also not be subject to the Roth requirement.
Does the mandatory Roth catch-up contribution require plans to adopt Roth contributions?
No. If a plan does not include Roth contributions, then a participant who is subject to the Roth catch-up requirement would be prohibited from making catch-up contributions under the plan. There is no requirement that a plan must include a Roth contribution program. But conversely, if participants subject to the mandatory requirement are permitted to make Roth catch-up contributions, then all catch-up eligible participants must be permitted to also make Roth catch-up contributions.
Are the rules different for 403(b) plans?
Not under the proposed regulations. There was concern prior to the issuance of the new guidance that the universal availability rule could be violated where participants subject to the mandatory Roth requirement were not permitted to make catch-up contributions if a plan did not include Roth contributions. Universal availability requires all catch-up eligible participants under the plan to have an effective opportunity to make the same dollar amount of catch-up contributions. The proposed regulations add to this rule by providing that a plan would not violate the universal availability requirement because the plan permits each catch-up eligible participant to make elective deferrals up to the maximum dollar amount of catch-up contributions permitted under applicable law with respect to that participant. The change in the underlined text resolves the universal availability problem for 403(b) plans that do not permit Roth contributions.
What if catch-ups are not designated as Roth contributions?
An individual subject to the mandatory Roth requirement may continue to make catch-up contributions, but only if the catch-up contributions are designated Roth contributions. But what if a participant subject to the requirement has only made an election to defer on a pre-tax basis? A plan may now provide for “deemed” Roth catch-up contribution elections. In other words, for any participant subject to the mandatory Roth requirement, deferrals in excess of the elective deferral limit will automatically be made as designated Roth contributions, even without an affirmative election.
The proposed regulations also provide for two new methods to correct a failure of the Roth catch-up requirement. The W-2 correction method would allow transferring the catch-up contributions from pre-tax to Roth accounts, and reporting the contribution as a Roth contribution on the participant’s Form W-2. The in-plan Roth rollover correction method would permit a direct rollover of the catch-up contributions and reporting of the contributions on Form 1099-R. Either correction method is permitted, but must be applied universally to all participants for a plan year.
Importantly, the new correction methods are only available if the plan sponsor has in place practices and procedures designed to result in compliance with the mandatory Roth catch-up requirement. A plan must adopt the deemed Roth catch-up contribution election to meet this requirement. The IRS is incentivizing adoption of the deemed contribution; not doing so will result in more complicated corrections of errors in administering the mandatory Roth requirement that will be less favorable to participants.
The proposed regulations are not the end for mandatory Roth catch-up contribution guidance. These rules are subject to change, and we will continue to monitor for new guidance from the IRS. But these rules do answer a lot of questions on how the IRS is planning on implanting this new SECURE 2.0 rule. If you have any questions about this or any other provision of SECURE 2.0, please feel free to contact any of Bricker Graydon’s Employee Benefits attorneys.
