SECURE 2.0 Act Insights

Read the following articles by retirement plan and legislative subject matter experts written to help you understand the regulations, best practices and opportunities brought about by this legislation. Learn more in this on-demand webcast — SECURE 2.0 Act Update: Putting it into Practice. Register and replay this webcast dated August 31, 2023, anytime. New Catch-up Contribution Rules: What Retirement Plan Sponsors Need to Know Part of a series | SECURE 2.0 Act Insights A new provision of SECURE 2.0 impacts catch-up contributions for higher-earning employees starting in January 2026. Here's what plan sponsors need to do to be ready.

The Internal Revenue Service (IRS) has issued final regulations regarding the provisions of the SECURE 2.0 Act of 2022 that relate to catch-up contributions made by participants in 401(k), 403(b), and governmental 457(b) retirement plans.

These regulations provide much-awaited guidance, addressing key questions that employers and plan administrators identified after the publication of the proposed regulations.

Some background on the new rules SECURE 2.0 contains a provision that requires employees who earn more than $145,000 in wages with their employer in the prior tax year to make retirement plan catch-up contributions only as Roth and not pre-tax. This provision was set to go into effect on January 1, 2024; however, the IRS delayed the implementation and has now finalized the regulations with some additional changes.

These regulations will become effective for taxable years beginning on January 1, 2027. That means that plan sponsors will need to implement the requirements of the law, in good faith, for the 2026 taxable year, and must comply with the final regulations beginning in 2027.

What retirement plan sponsors need to know Here's a recap of the four key provisions regarding the Roth catch-up requirement, correction methods in the event of a mistake, deadlines to make those corrections and changing contribution limits.

1. Roth catch-up contribution requirement Definition of wages The IRS clarified that wages are defined by reference to Social Security wages using box 3 of Form W-2 and not Medicare wages (box 5).

Determination of employer sponsoring the plan Generally, wages are determined separately for each employer contributing to the plan so that a participant may have different wages for different employers under the plan.

Optional aggregation: Plans may choose to aggregate wages from related employers (for example, those using a common paymaster or members of a controlled group) so that a single amount for wages can be used for all employers in the plan.

Deemed Roth catch-up elections Plans can implement a deemed Roth catch-up election where a plan participant subject to the Roth requirement is automatically treated as electing Roth for their catch-up contributions when they reach a contribution limit. The participant must have an opportunity to make a different election.

The deemed election must cease to apply within a reasonable period if the employee is no longer subject to the Roth requirement.

Timing and designation of Roth contributions Designated Roth contributions made earlier in the calendar year can count towards satisfying the Roth catch-up requirement, even if made before the participant reaches an applicable deferral limit.

Plans without Roth contribution provisions Plans are allowed to permit catch-up contributions for participants who are not subject to the Roth requirement, even if participants who are subject to it cannot make catch-up contributions.

The proposed regulations required non-discrimination testing in this case and the final regulations provide a safe harbor for testing for such plans.

2. Correction methods for failures If a participant subject to the Roth catch-up requirement makes a pre-tax catch-up contribution, the plan will fail to be qualified unless the failure is corrected. The general method of correcting such a failure would be to distribute the excess amount to the participant as a taxable distribution.

Two new methods are provided as alternatives to distributing the excess deferrals. To use these correction methods, the plan sponsor or administrator must have appropriate practices and procedures in place and must use the deemed Roth election.

Form W-2 correction method Transfer the catch-up contribution (adjusted for earnings/losses) from the pre-tax account to the designated Roth account and report it as a designated Roth contribution on the original Form W-2 for the year of deferral. This method can only be used if the Form W-2 for that year has not yet been filed or furnished.

In-plan Roth rollover correction method Directly roll over the catch-up contribution (adjusted for earnings/losses) from the pre-tax account to the designated Roth account within the plan, similar to an in-plan Roth conversion. This is reported on Form 1099-R for the year of rollover, and the amount is includible in gross income for the year in which the rollover occurs.

If the amount of the pre-tax elective deferral that was required to be Roth does not exceed $250, correction is not required, and the elective deferral will be treated as a catch-up contribution.

3. Correction deadlines The final regulations extended the deadline for correction to the last day of the taxable year following the taxable year for which the elective deferral was made. In some circumstances (e.g. Actual Deferral Percentage [ADP] testing failures recharacterized as catch-up contributions), excess contributions must be corrected within 2.5 months (or 6 months for certain automatic enrollment plans) after the close of the plan year, in order to avoid a 10% excise tax.

4. Increased catch-up contribution limits For taxable years beginning after December 31, 2024, participants who attain age 60- 63 during the taxable year are eligible for an increased catch-up limit of 150% of the otherwise applicable dollar catch-up limit in effect for 2024 ($11,250 in 2025). These increased limits are subject to annual cost-of-living adjustments, and cease to apply to participants at the beginning of the taxable year in which they turn age 64 and the regular limit would then apply.

Get ahead of these retirement plan changes Plan sponsors and administrators should review these provisions and work with their service providers to ensure compliance processes are in place beginning on January 1, 2026. Amendments to plan documents will be needed to conform with the final regulations and those will be part of the SECURE Act amendments generally due by December 31, 2026.

These new catch-up contribution rules affects a meaningful segment of your workforce — higher earners who are age 50 or older and trying to boost their retirement savings. Getting it right helps them stay on track with their retirement goals and keeps your plan in compliance.

Not sure if your current retirement plan is up to par with changing requirements? Reach out to an ADP retirement services specialist or call 253-666-8663.