To Roth or Not to Roth – That is No Longer the Question for Some Catch-Up Eligible Individuals
By: Lyndsey Barnett and Michaela Taylor*
Catch-up eligible individuals enrolled in an employer-sponsored retirement plan have new changes coming their way under Secure 2.0. Beginning in 2024, individuals age 50 or older by the end of the calendar year in which the plan year ends, that made over $145,000 in wages in the previous year with the same employer will no longer be permitted to make pre-tax catch-up contributions to their plan. Instead, these catch-up contributions must be designated as Roth contributions and employees may no longer take a tax deduction. These new restrictions will apply to all plans excluding SARSEP and SIMPLE IRAs.
Prior to the passage of SECURE 2.0 employees age 50 or older could contribute the maximum employee deferral amount for the year as well as additional catch-up contributions. In 2023, a catch-up eligible participant in a qualified plan (401(k), 403(b), and 457(b)) could defer up to $7,500 in catch-up contributions in addition to the maximum deferral of $22,500 for a total maximum yearly deferral of $30,000. These catch-up contributions could be contributed pre-tax, as Roth contributions, or both. However, under the new system, Roth deferrals are now the only option for participants who earned over $145,000 in the prior calendar year.
As mentioned, these restrictions only apply to wages from the same “employer sponsoring the plan.” According to the Internal Revenue Code, wages are limited to income paid to an employee by an employer, meaning that self-employed individuals, and independent contractors can continue to make pre-tax catch-up contributions up to the maximum deferral limit. Additionally, wages in this context are not equal to a participant’s wages for the prior year from all employers but are instead limited to wages earned under the particular employer sponsoring the participant’s plan.
While this provision is mandatory for high-paid participants, plan sponsors are not required to provide a Roth contribution option in their plan. However, plans that currently offer catch-up contributions but do not offer Roth must either add a Roth contribution option or eliminate the plan’s catch-up contribution option for all employees. Plan Sponsors should consider creating a process early on to identify participants as the compensation standards may differ from those regularly used by the plan, requiring more work on the back end to identify these individuals.
In addition to the Roth change for catch-ups, SECURE 2.0 also increases the catch-up limit. Effective in 2025, Secure 2.0 increases catch up contribution limits to the greater of $10,000 or 150 % of the catch-up limit for that year for individuals ages 60, 61, 62 and 63. Given that the current catch-up limit is $7,500, it is anticipated that it will always be 150% (as 150% of $7,500 already exceeds $10,000). The increased amounts will be indexed for inflation in the following years.
The IRS is expected to issue further guidance on these rules. If you have any questions about this or any portion of SECURE 2.0, please contact any of Graydon’s Employee Benefits team. You may also join the Employee Benefits team on Tuesday, April 4th at 1 p.m. for the final portion of our three-part conversation diving into the details of SECURE 2.0. Recordings of the previous sessions are also available. Registration can be found here.