Roth Catch-Up Mandate in Secure 2.0: The Devilish Details

The Roth catch-up contribution requirement, effective in 2026, is much more complex than it appears.

The Internal Revenue Service has offered a two-year delay for the Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act’s mandate that all catch-up contributions for certain high-income taxpayers be treated as Roth contributions.

Still, many plan sponsors and participants have been wondering about the details that will determine how the rule is implemented in practice. 

In the same guidance that delayed the formal effective date of the Roth catch-up mandate, the IRS answered some pressing questions — and acknowledged that additional questions remain to be answered in forthcoming guidance. 

Secure 2.0 & Catch-Up Contributions: The Basics

For company-sponsored retirement plans, including 401(k)s and 403(b) plans, the catch-up contribution limit is $7,500 in 2023. Starting in 2025, a separate catch-up contribution is permitted for taxpayers who are between ages 60 and 63. That contribution limit will be equal to the greater of (1) $10,000 or (2) 150% of the standard catch-up contribution limit for 2024. The $10,000 limit will also be indexed for inflation. Once the taxpayer turns 64, the standard catch-up contribution limit applies.

Starting in 2026, after the two-year IRS delay, if a taxpayer has income of at least $145,000 for the prior year, the catch-up contribution for the subsequent year must be treated as a Roth contribution. That means these funds are contributed with after-tax dollars, so they will not reduce current taxable income but can be withdrawn tax-free in the future. The $145,000 amount will also be indexed for inflation.

The $145,000 threshold is new and is not tied to existing definitions of highly compensated employees. That amount is also tied to W-2 income, so if an S corporation owner takes $130,000 in compensation but also receives additional profits from the corporation, the owner will not have crossed the $145,000 threshold to trigger the Roth contribution rule.

Similarly, many expected that the new Roth contribution rule would not apply to sole proprietors, partners in partnerships, or LLC members who are taxed as sole proprietors. That’s because these taxpayers are considered self-employed and, by definition, do not receive W-2 compensation. 

IRS Guidance on the Roth Catch-Up Mandate

In Notice 2023-62, the IRS delayed the effective date of the new Roth catch-up rule to 2026. The IRS also confirmed that the definition of wages for purposes of the Roth mandate includes only those that are subject to FICA taxes (so amounts that are reported in Box 3 of a taxpayer’s Form W-2).

The IRS clarified that if an employee subject to the Roth catch-up requirement elects to make catch-up contributions on a pretax basis, the plan sponsor can disregard that election and treat the catch-up as a Roth contribution. 

When multiple employers sponsor the same 401(k) and an employee has wages from more than one employer, the amounts will not be aggregated for purposes of determining whether the employee is subject to the Roth mandate. 

The IRS has requested comments on whether employers should be required to either offer a Roth option or eliminate catch-up contributions altogether (in other words, whether an employer should be permitted to not offer a Roth option and limit catch-up contributions to lower-paid employees who are eligible to make pretax catch-up contributions). Under current law, offering a Roth contribution option is at the discretion of employer-sponsored retirement plans.

Conclusion

The Roth catch-up contribution requirement is much more complex than it appears. It is expected that additional guidance and clarification will be forthcoming before the mandate formally becomes effective. Of course, plan sponsors and participants should start planning now to be ready for the future changes.

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