The Internal Revenue Service (“IRS”) issued proposed regulations regarding the provisions of the SECURE 2.0 Act of 2022 (“SECURE 2.0”) that relate to catch-up contributions.
The proposed regulations are for the requirement imposed by SECURE 2.0 that catch-up contributions for highly compensated employees in Section 401(k), 403(b), and governmental 457(b) plans be designated as Roth contributions (the “mandatory Roth catch-up” provision).
The Roth catch-up requirement was originally scheduled to become effective for taxable years beginning after December 31, 2023, but it was delayed until taxable years beginning after December 31, 2025.
The regulations will permit a 401(k) or 403(b) plan to provide that a participant who is subject to the mandatory Roth catch-up requirement is deemed to have irrevocably designated any catch-up contributions as designated Roth contributions. A plan could provide for such a deemed election regardless of whether it requires separate catch-up contribution elections or utilizes a spillover design. However, a plan that provides for such a deemed election must provide the participant with an opportunity to make a new election that is different from the deemed election.
The regulations hold that an individual who did not have any FICA wages from the employer sponsoring the plan for the preceding calendar year would not be subject to the mandatory Roth catch-up requirement under the plan in the current year.
The FICA wage threshold would not be prorated for an individual’s year of hire. So that means that a participant who worked for the employer sponsoring the plan for only part of the preceding year would be subject to the mandatory Roth catch-up requirement under the plan in the current year only if the participant had wages exceeding the full FICA wage threshold from the employer for the preceding calendar year.
The regulations also include two self-correction programs that a plan could use to correct a failure of the mandatory Roth catch-up provision. A plan could provide for either correction method but must use the same correction method for all participants with deferrals over the same applicable limit in a plan year. To use these correction methods, a plan must have practices and procedures in place that are designed to result in compliance with the mandatory Roth catch-up provision. As part of such practices and procedures, a plan must provide for a deemed Roth catch-up election for participants who are subject to the mandatory Roth catch-up provision. Plans would not be permitted to avoid mistakes by categorically requiring that all catch-up contributions be made as designated Roth contributions.
Where a participant’s Form W-2 for a year has not yet been filed or furnished to the participant, a plan is allowed to correct a participant’s pre-tax catch-up contribution that was required to be a designated Roth contribution by transferring the deferral (adjusted for allocable gain or loss) from the participant’s pre-tax account to the participant’s designated Roth account and reporting the contribution (not adjusted for allocable gain or loss) as a designated Roth contribution on the participant’s Form W-2 for the year of the deferral. The contribution would be includible in the participant’s gross income for the year of the deferral.
The other correction method is allowing the plan to correct a participant’s pre-tax catch-up contribution that was required to be a designated Roth contribution through an in-plan Roth rollover. Under this method, a plan would directly roll the deferral (adjusted for allocable gain
or loss) from the participant’s pre-tax account to the participant’s designated Roth account and report the amount of the in-plan Roth rollover on Form 1099-R for the year of the rollover. The contribution (adjusted for allocable gain or loss) would be included in the participant’s gross income for the year of the rollover.
