IRS Issues Mandatory Roth Catch-Up Regulations
One of the more controversial rules in the 2022 SECURE 2.0 Act is the requirement that plan catch-up contributions by certain highly-paid employees be made on a Roth basis. Last Friday, (January 10, 2025) the IRS issued proposed regulations on the new rule.
Congress intended for the Roth catch-up mandate to be effective on January 1, 2024. However, in response to a flood of complaints, the IRS in Notice 2023-62 delayed the effective date until January 1, 2026. The delay means that until next year, plans can continue to accept pre-tax catch-up contributions from all employees (including high-paid).
The proposed regulations are not technically effective until after the IRS issues final regulations. But plans are allowed to follow them in the interim. Since the regulations are mostly taxpayer-friendly, most plans will want to do that.
The regulations confirm several unanswered questions about the new mandatory Roth catch-up contribution, most of which were originally addressed in Notice 2023-62:
- The Roth mandate applies to 401(k), 403(b) and governmental 457(b) plans – but not to SIMPLE IRA plans.
- The requirement only applies to employees with “wages” from the employer in the preceding year that exceeds a dollar threshold. The IRS confirmed that “wages” means wages subject to FICA; that is, amounts reported on Box 3 (not Box 1) of W-2. The dollar threshold would have been $145,000 in 2023 wages for 2024 and would have remained $145,000 in 2024 wages for 2025. But it will go up in future years based on inflation. The threshold on 2025 wages for determining required Roth catch-up contributions for 2026 (when the rule becomes effective) will not be available until the end of this year.
- Self-employed individuals have self-employment income, not wages. If a self-employed person’s income exceeds the dollar limit in the prior year, is she required to make catch-ups on a Roth basis? The IRS says no. Only high-paid workers with actual “wages” are subject to the Roth rule.
- The look-back wage rule means that new employees — no matter how well paid — will get a free pass in their first year of employment (because they have no wages the previous year from the new company). And, because the IRS says the dollar threshold is not pro-rated for the first year of employment, some highly-paid employees also will not be affected in their second year of employment.
- One important issue the IRS punted on in 2023 was addressed in the new regulations: What if a plan doesn’t already offer Roth contributions (since they are optional)? The IRS says it will not force an employer to put in a Roth option. But if a plan does not have a Roth option, pre-tax catch-ups could only be made available to lower-paid employees (i.e., those who would not have been subject to the mandatory Roth rule). Higher-paid employees could not make any catch-ups – pre-tax or Roth. Of course, most employers would be uncomfortable with this arrangement because it would alienate its highest-earning employees. So, the practical impact is that plans without a Roth contribution option will likely have to introduce one for 2026.
This is the only mandatory Roth rule in SECURE 2.0. Many affected employees may be better off making catch-up contributions on a Roth basis anyhow, but starting next year they will have no choice.
By Ian Berger, JD
IRA Analyst
Ed Slott and Company, LLC
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.