January 20, 2025
Earlier this month, the IRS issued IR-2025-07 which contains proposed regulations impacting catch up contribution rules. Specifically, there is important information on how the new Roth Catch Up Contribution Rule should be applied. It includes detailed information on the determination of wage threshold, FICA wages, definition of employer sponsor, and available correction methods. The proposed regulations are designed to help plan administrators comply with the new SECURE Act 2.0 provisions. Although the effective date for the change was extended to 2026, plan sponsors should carefully review the recent guidance to ensure compliance. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.
Mandatory ROTH Catch Up Contribution Rule
Section 603 of the SECURE Act 2.0 created new restrictions on catch-up contributions made by individuals earning more than $145,000 in FICA wages in the prior tax year. These high earners are required to make all catch up contributions as ROTH after tax contributions. Starting after December 31, 2024, the ROTH catch up wage threshold will be adjusted for cost-of-living changes.
Proposed Regulation Highlights
- Plans Without Roth Contributions – Employers are not required to offer a qualified Roth contribution program within the plan. Under these circumstances, if the plan does not offer this feature, then impacted participants would not be allowed to make any catch-up contributions. However, those not subjected to the requirement will still be allowed to make catch-up contributions. It is important to note, these plans are still required to track and document which participants are subject to the new rule.
- Determination of FICA Wages – Since the threshold is based on FICA wages earned, the proposed regulations provide details on how FICA wages are determined. Only wages subjected to Social Security and Medicare taxes are applied against the wage threshold. If the prior year FICA earnings were less than $145,000 then the rule does not apply. This includes individuals who received cash compensation but did not have the required FICA wages from the plans sponsor.
- Employer Sponsoring the Plan – The regulations define the employer sponsoring the plan as the participant’s common law employer. For multi-employer plans, prior year FICA wages from one employer are not aggregated with wages from another plan sponsor when determining whether the wage threshold has been met. This is consistent with the prior 2023 IRS guidance.
- Availability of Roth Catch Up Contributions – The proposed guidance also requires a plan that has at least one impacted participant, and the Roth provision is offered, then all participants must be given the opportunity to make Roth catch up contributions.
- Correction Methods – If a participant subject to the requirement makes a pre-tax deferral above the applicable limit, then a plan will no longer be qualified unless the error is correct. The proposed guidance offered detailed instructions for correction which includes either a distribution of the pre-tax deferral or an in-plan rollover. Under the W-2 method, the contribution would be included in the participant’s gross income for the year. However, this method cannot be used if the participant’s W-2 for the year has already been issued. Under the rollover method, the plan would roll over the elective deferral from the pre-tax to the designated Roth account and report the amount on IRS Form 1099-R for the year of the rollover.
- Applicability Date – For non-bargained plans, the amendments are proposed to apply six months after the final regulations are issued. For collectively bargained plans, the amendments are proposed to apply to contributions in taxable years beginning more than 6 months after the date final regulations are issued.
Contact Us
The information outlined in the proposed regulations provides important details for plan sponsors required to implement the catch-up contribution rule. While final regulations have yet to be released, this information provides important insights into how the new requirement will be handled. If you have questions about the information outlined above, or need assistance with your 401k plan audit, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.
