The President signed the Consolidated Appropriations Act, which included SECURE Act 2.0, on December 29, 2022.

SECURE Act 2.0 has over 90 provisions, some major and some minor; some mandatory and some optional; some retroactively effective and some that won’t be effective for years to come. One difference between the SECURE Act 2.0 and previous acts is that so many of 2.0’s provisions are optional…that is, plan sponsors are not required to adopt the provisions, but can if they conclude that the change will help their plans and participants. This series discusses the provisions that are likely to be the most impactful, either as options or as required changes.

This article discusses one of the mandatory provisions—that catch-up contributions for participants who earn over $145,000 (indexed) must be treated as Roth deferrals. That is, the deferrals will be after-tax, but the withdrawals of those contributions will be tax-free and, if the Roth conditions are satisfied, the withdrawals of earnings will also be tax-free. In addition, the RMD rules do not apply to Roth accounts (and, as a result, withdrawals from Roth accounts can be deferred indefinitely until the money is needed).

This provision is a revenue offset to other provisions in SECURE 2.0. That is because Roth deferrals are taxed to participants in the year made, while the tax-free withdrawals will be in the future. In Congressional budgeting, the analysts only take into account a 10-year period, so that taxes paid in the 10 years is considered as revenue, but any tax benefits after the end of the 10-year window are not considered as tax losses. In other words, it’s a bit of a game.

Unfortunately, in the process of drafting the legislation, a mistake was made…the provision in the Internal Revenue Code that permits catch-up contributions was accidentally repealed. Unless that is corrected, no catch-up deferrals will be permitted after 2023. In a reasonable world, there would be a technical corrections act in 2023 and the problem would be taken care of. However, it remains to be seen if Congress will be reasonable on this issue in light of the fights about budgets, taxes and expenses.

Concluding thoughts

Plan sponsors need to be told about this new requirement and about the possibility that catch-up contributions will not be permitted in 2024 (although they are allowable this year). In turn, participants who are higher paid need to be told about the new Roth treatment (in 2024) for their catch-up deferrals—in case Congress does pass technical corrections legislation to fix its drafting error and catch-up contributions are permitted in 2024 and thereafter. Since higher earning older participants are likely in high tax brackets, it may not make sense for many of them to make catch-up deferrals as Roth contributions. (Generally speaking, the tax treatment of Roth contributions works best when the Roth deferrals are made in lower income years and the money is later withdrawn in higher income years. For some, perhaps many, older high earning executives and managers, catch-up contributions will be made in higher income—and therefore tax bracket—years and withdrawn in lower income years in retirement.)

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The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.