SECURE 2.0 Changes for New Year: Key Takeaways for Retirement Plan Sponsors, Part 2 – Catching Up on Catch-Ups

Employee Benefits & Executive Compensation Group

On December 29, 2022,  President Joe Biden signed the SECURE 2.0 Act of 2022 (“SECURE 2.0”), into law as a part of the Consolidated Appropriations Act, 2023.  SECURE 2.0 includes a wide range of changes geared toward expanding retirement plan access and encouraging retirement savings, while building on certain provisions of the SECURE Act of 2019 (“SECURE 1.0”).

This advisory is the second of multiple client advisories addressing SECURE 2.0 and focuses on upcoming changes to 401(k), 403(b), and governmental 457(b) plans with eligible deferral features (“applicable plans”) that allow certain older participants to make additional elective deferrals (“catch-up contributions”).  Part 1 of these client advisories, focusing on key SECURE 2.0 changes in effect for existing retirement plans, can be found here.

The Basics

Under current law, applicable plans may (but are not required to) provide participants who will attain at least age 50 by December 31 of a given year (an “eligible participant”) the ability to make elective deferrals in excess of otherwise applicable limits.  These contributions were first introduced in 2002 as a means to allow older participants to catch up on their retirement savings.  Catch-up contributions, if permitted, can be made on a pre-tax basis or on a Roth after-tax basis, depending upon the plan design.

The limit on catch-up contributions for the 2023 tax year is $7,500, and these contributions are not subject to the annual dollar limit on elective deferrals or the limit on annual additions.  This means that an eligible participant could potentially defer up to $30,000 for the 2023 tax year and receive a total annual contribution of up to $73,500.  The catch-up limit is aggregated across all plans the participant may contribute to in a taxable year.

Catch-up contributions are also not subject to ADP testing applicable to 401(k) plans.  Deferrals a participant makes in excess of an ADP limit (“excess contributions”) generally are required to be returned to the participant or recharacterized. To the extent that an eligible participant has excess contributions but has not exceeded the catch up limit for the applicable plan year, the plan is required to treat the participant’s excess contributions as catch-up contributions.

If a plan provides catch-up contributions, the ability to make these contributions must be made available to all eligible participants.  In addition, if one eligible plan allows catch-up contributions in a controlled group, all applicable plans in that controlled group must also allow catch-up contributions.

Catch-up contributions do not have to be subject to a matching formula unless the plan is a safe harbor plan.  Employers sponsoring non-safe harbor 401(k) plans can, but are not required to, match catch-up contributions.

Changes Coming For 2024

Beginning with taxable years starting on or after January 1, 2024, if an applicable plan (other than a SEP or SIMPLE plan) allows catch-up contributions, catch-up contributions for “higher-paid participants” must be made as Roth contributions.  A “higher-paid participant” is different than a highly compensated employee.  In this case, a “higher-paid participant” is an eligible participant whose wages received from the plan sponsor for the preceding calendar year exceed $145,000 (as indexed).  Wages as calculated for FICA tax purposes must be used for this test. Additionally, if an applicable plan has a higher-paid participant and wants to permit catch-up contributions, the plan must allow any eligible participants who are not higher-paid participants to designate catch-up contributions as Roth deferrals.

Note:  Because this law applies on a taxable year basis, applicable plans on a fiscal plan year should take steps ahead of the 2023-2024 plan year to determine how to implement this rule.

Note:  This new rule introduces a new definition of compensation and a new group of participants for recordkeepers to track, which will significantly complicate plan administration.   

Note:  Plan sponsors who allow catch-up contributions but have resisted adding Roth deferrals may face a difficult decision — either stop allowing any catch-up contributions beginning in 2024 or add Roth deferrals to the plan.

Note: SECURE 2.0 provides that the Treasury Department may provide through regulations a way for higher-paid participants to change their catch-up contributions elections if their compensation is determined to exceed the limit after such elections are made.  It is unclear whether this guidance (if provided) would allow an impacted participant to change pre-tax catch-up contributions to Roth contributions or if it would allow a participant to withdraw catch-up contributions if the participant later discovers that the mandatory Roth provision applies.

Note:  If a 401(k) plan fails the ADP test and a higher-paid participant has made only pre-tax excess contributions, it is not entirely clear how those contributions may be treated if they will be required to be recharacterized under this new rule.

Note:  While this rule may effectively force higher-paid participants who wish to make catch-up contributions to make Roth contributions, SECURE 2.0 also relaxes currently applicable required minimum distribution rules with respect to Roth designated accounts in employer-sponsored qualified retirement plans. This change eliminates the pre-death distribution requirement for Roth accounts in employer plans effective for taxable years beginning on or after January 1, 2024. It does not apply to distributions that are required with respect to years beginning before January 1, 2024, but are permitted to be paid on or after such date.

Changes Coming For 2025

While SECURE 2.0 increases the catch-up limit for certain older participants, determining an eligible participant’s maximum catch-up contribution limit will become more complicated for taxable years beginning on or after January 1, 2025.  While the catch-up limit for eligible participants will remain relatively simple for the years before they attain age 60, catch-up limits will increase for those who attain age 60-63 by the end of each taxable year. For these older participants, the increased catch-up contribution limit will be the greater of:

  • $10,000 (as indexed) or
  • 150% of the dollar amount that would be in effect for 2024 for other eligible participants (if the 2023 catch-up limit remains the same for 2024, this limit would be $11,250).

Different limits apply to SIMPLE plans. The increased catch-up limits will revert to the generally applicable “age 50” limits beginning with the taxable year in which the eligible participant attains age 64.

Note:  These new provisions will significantly complicate plan administration.  Plans will need to be able to track not only when a participant attains age 50, but also ages 60 and 64 for purposes of these rules.

Note:  Plans will need to make sure that notices and summary plan descriptions clearly explain these new rules to participants.

Amendments required to comply with SECURE 2.0 must be adopted on or before the last day of the first plan year beginning on or after January 1, 2025 (January 1, 2027 for governmental and applicable collectively bargained plans), but plan sponsors will need to be thinking about these changes now in order to prepare.  Plan administrators will need to ensure that their plans are being operated in compliance with applicable SECURE 2.0 requirements as of their applicable effective dates pending remedial amendment.

If you have any questions or need any additional information, please reach out to an attorney in the Employee Benefits Group for more information.