The Secure Act 2.0 made an important change for both qualified 401(k) and 403(b) plans regarding catch-up contributions. Effective January 1, 2024, highly compensated participants earning over $145,000 in FICA wages during the prior calendar year (adjusted annually for cost-of-living) are required to make their catch-up contributions as Roth contributions.
Plan Sponsors will need to make decisions on how to implement the Roth catch-up contributions in the plan document. The plan must allow for Roth contributions or amend the plan to allow for Roth contributions. If the plan does not allow for Roth contributions, highly compensated participants cannot make catch-up contributions. In addition, the plan must allow all eligible participants to make Roth catch-up deferrals.
There are some concerns on Roth catch-up contributions that are awaiting guidance including:
- It is not clear how these rules affect ADP test failures for contributions that are recharacterized as catch-up.
- It is uncertain if the rules will allow for retroactive corrections to change pre-tax contributions to Roth contributions.
The Department of Treasury has received requests to delay or provide immediate guidance. If there is no delay or guidance, Plan Sponsors will be required to operationally comply with the Roth catch-up provisions beginning January 1, 2024. Amendments for the operational provisions will not be required until later in 2025.
It will be important that Plan Sponsors communicate these new rules with their employees and highly compensated participants that are catch-up eligible. Plan Sponsors should also coordinate with their payroll provider, recordkeeper and third-party plan administrator as soon as possible to update systems, understand responsibilities and facilitate the changes necessary to operationally comply with the Roth catch-up provision.