New IRS Guidance Addresses Catch-Up Contributions: 

On January 10, the IRS published proposed regulations. They provide guidance for retirement plans that allow participants who have attained at least a certain legally-specified age to make additional elective deferrals (i.e., catch-up contributions). If allowed under certain plans such as 401(k) plans and 403(b) plans, participants can make catch-up contributions if they have contributed the maximum amount otherwise allowed under their plan. The maximum allowable age 50 catch-up contribution for 2025 equals $7,500.

For any tax years beginning after December 31, 2024, the SECURE 2.0 Act of 2022 (“SECURE 2.0”) increases the age 50 catch-up limit for catch-up eligible participants who attains age 60, 61, 62, or 63 during a tax year. For such participants in plans that elect to adopt that age 60-63 provision, the increased catch-up limit is 150 percent of the age 50 catch-up limit. Thus, the maximum allowable age 60-63 catch-up contribution in such plans for 2025 equals $11,250. (These contributions are being widely referred to in the industry as “super catch-up contributions.”)

The proposed regulations reflect statutory changes made by SECURE 2.0. Highlights of the proposed regulations are as follows:

• SECURE 2.0 provides that catch-up contributions made by certain participants must be made as Roth contributions (the Roth catch-up requirement). Specifically, in the case of a catch-up eligible participant whose wages as defined in section 3121(a) of the Internal Revenue Code (FICA wages) for the preceding calendar year from the employer sponsoring the plan exceeded $145,000, catch-up contributions must be Roth contributions. Per the proposed regulations, that $145,000 amount may be indexed for inflation.
• Plans can provide that an employee who is subject to the Roth catch-up requirement, but who has elected to make pre-tax catch-ups, is deemed to have irrevocably designated any elective deferrals that are catch-up contributions as Roth contributions. In those cases, the elective deferrals must be (1) treated by the employer as includible in the employee’s gross income; and (2) maintained by the plan in a separate sub-account within the employee’s plan account.
• If a plan does not permit Roth contributions, then for a catch-up eligible participant who is subject to the Roth catch-up requirement, the maximum amount of his or her catch-up contributions equals $0.
• The proposed regulations also reiterate the SECURE 2.0 requirement that if a plan has any participants who are subject to the Roth catch-up requirement, those plans must allow all catch-up eligible participants to make catch-up contributions as Roth contributions.
• If a plan has more than one employer sponsoring it (e.g., related employers, multiple employer plans), a catch-up eligible participant’s wages for the preceding calendar year from one employer sponsoring the plan are not aggregated with the wages from another employer sponsoring the plan for purposes of determining whether the participant’s wages for the preceding calendar year exceeded the $145,000 FICA wages amount.
• A plan that violates the mandatory Roth catch-up requirements can generally correct that failure by transferring the catch-up contribution (adjusted for earnings and losses) from the participant’s pre-tax account to the participant’s Roth account and reporting the contribution (not adjusted for earnings and losses) as an elective deferral that is a Roth contribution on the participant’s Form W–2. Alternatively, the plan can directly roll over the catch- up contribution (adjusted for earnings and losses) 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.
• Plans can permit catch-up eligible participants who would attain age 60, 61, 62, or 63 during a tax year to make catch-up contributions up to the increased limit while only permitting other catch-up eligible participants to make catch-up contributions up to the applicable age 50 catch-up limit.

As a reminder, in August 2023, the IRS issued Notice 2023–62. Under that guidance, the IRS considers the first two tax years beginning after December 31, 2023 to be an administrative transition period with respect to the SECURE 2.0 Roth catch-up requirement. During that period, catch-up contributions made by a participant who is subject to the Roth catch-up requirement will be treated as satisfying SECURE 2.0’s Roth catch-up requirement even if the catch-ups are not actually made as Roth contributions. The proposed regulations do not alter that guidance.

The proposed regulations are to be effective six months after they are published in final form.

Finally, note that this article discusses the main rules for 401(k) plans, 403(b) plans, and governmental 457(b) plans. The proposed regulations’ rules for SEPs and for SIMPLE IRA plans are beyond this article’s scope.