Key Takeaways
- The SECURE Act 2.0 requires that catch-up contributions for higher compensated participants be treated as Roth deferrals.
- This provision is effective for tax years beginning after December 31, 2023 (that is, in 2024 for calendar year taxpayers).
- Unfortunately, due to a drafting error in the legislation, the provision in the Code that permits catch-up contributions is repealed beginning in 2024. But technical corrections legislation may correct that.
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).
