IRS Issues Proposed Guidance on Retirement Plan Catch-up Contributions

(Parker Tax Publishing January 2025)

The IRS issued proposed retirement plan regulations dealing with the ability of participants who have attained age 50 to make additional elective deferrals that are catch-up contributions. The proposed regulations (1) reflect statutory changes made by the SECURE 2.0 Act of 2022, including the requirement that catch-up contributions made by certain catch-up eligible participants must be designated Roth contributions, and (2) affect participants in, beneficiaries of, employers maintaining, and administrators of certain retirement plans. REG-101268-24.

Background

The SECURE 2.0 Act of 2022 (Pub. L. 117-328) amended Code Sec. 414(v) to provide changes to the retirement plan catch-up contribution requirements for certain catch-up eligible participants. Code Sec. 414(v)(1) provides that an applicable employer plan will not be treated as failing to meet any requirement of the Code solely because it permits an eligible participant to make additional elective deferrals in any plan year.

Section 109 of the Secure 2.0 Act amended Code Sec. 414(v)(2) to increase, for tax years beginning after December 31, 2024, the applicable dollar catch-up limit in the case of a catch-up eligible participant who attains age 60, 61, 62, or 63 during the tax year. For such a participant in an applicable employer plan other than a SIMPLE plan, the increased applicable dollar catch-up limit is 150 percent of the otherwise applicable dollar catch-up limit in effect for 2024. For a participant in a SIMPLE plan, the increased applicable dollar catch-up limit is 150 percent of the otherwise applicable dollar catch-up limit in effect for 2025. In either case, for a year beginning after December 31, 2025, the increased applicable dollar catch-up limit is subject to adjustment to reflect changes in the cost of living.

Section 117 of the SECURE 2.0 Act amended Code Sec. 414(v)(2) to increase the applicable dollar catch-up limit for SIMPLE plans sponsored by certain eligible employers. The increased limit is available automatically to a SIMPLE plan sponsored by an eligible employer that had no more than 25 employees who received at least $5,000 of compensation from the employer for the preceding calendar year. Other eligible employers may make an election for the increased applicable dollar catch-up limit to apply and, if the election is made, the employer must make additional matching or nonelective contributions. The increased applicable dollar catch-up limit, which applies to tax years beginning after December 31, 2023, is 110 percent of the otherwise applicable dollar catch-up limit for calendar year 2024. For a year beginning after December 31, 2024, the increased applicable dollar catch-up limit is subject to inflation adjustments.

Section 603 of the SECURE 2.0 Act added Code Sec. 414(v)(7)(A), which requires that catch-up contributions made by certain catch-up eligible participants must be designated Roth contributions (the Roth catch-up requirement). Designated Roth contributions are considered elective contributions that are currently includible in taxable income. Specifically, in the case of a catch-up eligible participant whose wages for the preceding calendar year from the employer sponsoring the plan exceeded $145,000, Code Sec. 414(v)(1) applies only if any catch-up contributions made by the participant are designated Roth contributions.

In addition, Section 603(b) of the SECURE 2.0 Act amended Code Sec. 457(e)(18)(A)(ii) to provide that a portion of the catch-up contributions made to an eligible governmental 457(b) plan for the last three tax years ending before the individual attains normal retirement age must be designated Roth contributions. The portion that is subject to this Roth requirement is the amount by which the applicable dollar catch-up limit exceeds the maximum permitted contribution.

Section 603(b) of the SECURE 2.0 Act also eliminated Code Sec. 402(g)(1)(C), which had provided that a catch-up eligible participant's gross income did not include certain elective deferrals in excess of the applicable dollar amount under Code Sec. 402(g)(1)(B) to the extent that the amount of those elective deferrals did not exceed the applicable dollar catch-up limit under Code Sec. 414(v)(2)(B)(i) for the tax year (without regard to the treatment of the elective deferrals by an applicable employer plan under Code Sec. 414(v)).

In Notice 2023-62, the IRS clarified that, despite the elimination of Code Sec. 402(g)(1)(C), applicable employer plans may, for tax years beginning after December 31, 2023, continue to permit catch-up eligible participants to make elective deferrals that exceed the applicable dollar amount under Code Sec. 402(g)(1)(B) (or deferrals that exceed the applicable dollar amount under Code Sec. 457(e)(15)) if those contributions in excess of the applicable dollar amount satisfy the requirements for catch-up contributions under Code Sec. 414(v). In addition, pursuant to Notice 2023-62, the first two tax years beginning after December 31, 2023, are regarded as an administrative transition period with respect to the Roth catch-up requirement. During this period, catch-up contributions made by a participant who is subject to the Roth catch-up requirement will be treated as satisfying the requirements of Code Sec. 414(v)(7)(A), even if the contributions are not designated Roth contributions.

Observation: For 2025, the catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is $7,500. The catch-up contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan who attain age 60, 61 62, or 63 in 2025 is $11,250. The dollar limitation for catch-up contributions to a SIMPLE 401(k) plan or a SIMPLE IRA for individuals aged 50 is $3,500. The dollar limitation for catch-up contributions to a SIMPLE 401(k) plan or a SIMPLE IRA for individuals who attain age 60, 61, 62, or 63 in 2025 is $5,250. The dollar limitation for catch-up contributions to certain SIMPLE 401(k) or SIMPLE IRA plans or accounts that generally apply for individuals age 50 or over is $3,850.

REG-101268-24

On January 13, the Federal Register published proposed regulations in REG-101268-24 which provide guidance for retirement plans that permit participants who have attained age 50 to make additional elective deferrals that are catch-up contributions. The proposed regulations reflect statutory changes made by the SECURE 2.0 Act of 2022, including the requirement that catch-up contributions made by certain catch-up eligible participants must be designated Roth contributions.

In accordance with Code Sec. 402A(a), an applicable employer plan may, but is not required to, include a qualified Roth contribution program. However, in the case of a catch-up eligible participant who is subject to the Roth catch-up requirement, Code Sec. 414(v)(1) applies only if any catch-up contributions made by the participant are designated Roth contributions. Therefore, if an applicable employer plan does not include a qualified Roth contribution program, then a participant who is subject to the Roth catch-up requirement would be prohibited from making catch-up contributions under the plan.

The proposed regulations do not require an applicable employer plan to include a qualified Roth contribution program. Thus, under the proposed regulations, an applicable employer plan that does not have a qualified Roth contribution program is allowed to permit catch-up eligible participants who are not subject to the Roth catch-up requirement to make catch-up contributions, even though catch-up eligible participants who are subject to the Roth catch-up requirement are not permitted to make catch-up contributions.

Current regulations set forth a general rule that an applicable employer plan will not satisfy the requirements of Code Sec. 401(a)(4) unless all catch-up eligible participants who participate under any applicable employer plan maintained by the employer are provided with an effective opportunity to make the same dollar amount of catch-up contributions. Prop. Reg. Sec. 1.414(v)-1(e)(1) sets forth an exception for a plan that allows an increased applicable dollar catch-up limit for participants attaining age 60 through 63. Similarly, Prop. Reg. 1.414(v)-2(b)(2) provides that an applicable employer plan that does not include a qualified Roth contribution program does not fail to satisfy the universal availability requirement merely because the plan (or another applicable employer plan maintained by the employer that does not include a qualified Roth contribution program) does not permit catch-up eligible participants who are subject to the Roth catch-up requirement to make catch-up contributions.

Prop. Reg. Sec. 1.414(v)-2(a) sets forth general rules relating to the Roth catch-up requirement under Code Sec. 414(v)(7)(A). Under Prop. Reg. Sec. 1.414(v)-2(a)(2), if a catch-up eligible participant in an applicable employer plan had FICA wages for the preceding calendar year from the employer sponsoring the plan that exceeded $145,000, then Code Sec. 414(v)(1) applies with respect to the participant's elective deferrals that are catch-up contributions only if they are designated Roth contributions. Under Prop. Reg. Sec. 1.414(v)-2(a)(3), the $145,000 Roth catch-up wage threshold is subject to cost-of-living adjustments. Under Prop. Reg. Sec. 1.414(v)-2(a)(4), the Roth catch-up requirement does not apply to a participant in a SEP arrangement or a SIMPLE IRA plan.

Consistent with Code Sec. 414(v)(7)(A) and the description of anticipated guidance in Notice 2023-62, Prop. Reg. Sec. 1.414(v)-2(a)(2) provides that a participant who did not have FICA wages exceeding $145,000 (as adjusted) from the employer sponsoring the plan for the preceding calendar year would not be subject to the Roth catch-up requirement under the plan for the current year. Prop. Reg. Sec. 1.414(v)-2(a)(2) defines FICA wages by reference to the FICA taxes imposed by Code Sec. 3101(a) and Code Sec. 3111(a), not Code Sec. 3101(b) and 3111(b), and notes that the wages are taken into account for this purpose in the same year that they are taken into account for FICA tax purposes. Accordingly, an individual who did not have any FICA wages from the employer sponsoring the plan for the preceding calendar year (for example, a partner who had only self-employment income) is not subject to the Roth catch-up requirement under the plan in the current year. Similarly, an individual who received cash compensation from the employer sponsoring the plan in the preceding calendar year but nevertheless did not have any FICA wages from the employer for that year (for example, because the compensation was taxed in an earlier year pursuant to Code Sec. 3121(v)(2)) is not subject to the Roth catch-up requirement under the plan in the current year.

Further, Prop. Reg. 1.414(v)-2 does not require that the Roth catch-up wage threshold be prorated for the first year of hire. Thus, a participant who worked for the employer sponsoring the plan for only part of the preceding calendar year is subject to the Roth catch-up requirement in the current year only if the participant had wages exceeding the full Roth catch-up wage threshold from the employer for the preceding calendar year.

Effective Dates

The regulations relating to amendments to Code Sec. 414(v)(2) to provide for a higher applicable dollar catch-up limit for individuals who attain age 60, 61, 62, or 63 during the tax year generally are proposed to apply to contributions in tax years beginning after December 31, 2024. Other provisions are proposed to apply to contributions in tax years beginning after a date that is six months after publication of the final regulations or, at the election of the taxpayer, tax years beginning after December 31, 2024.

For a discussion of the statutory changes made to retirement plans by the SECURE 2.0 Act and the rules for qualified plan distributions, see Parker Tax ¶131,500.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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