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 retirement plan laws is that many of 2.0’s provisions are optional…that is, plan sponsors are not required to adopt the provisions, but can if they decide 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 becomes effective in 2024…catch-up contributions for higher compensated employees must be treated as Roth contributions.

The Senate Finance summary of the provision says:

Section 603 [of SECURE Act 2.0], Elective deferrals generally limited to regular contribution limit. Under current law, catch-up contributions to a qualified retirement plan can be made on a pre-tax or Roth basis (if permitted by the plan sponsor). Section 603 provides all catch-up contributions to qualified retirement plans are subject to Roth tax treatment, effective for taxable years beginning after December 31, 2023. An exception is provided for employees with compensation of $145,000 or less (indexed).

Obviously, participants who make over $145,000 should be alerted to this change. And, of course plan sponsors should be alerted to the change and educated about their options. For example, should the plans add Roth accounts or should they deny higher compensated participants the right to make catch-up contributions?

As that suggests, there are a number of issues with this provision. Here are some:

• How is the $145,000+ compensation calculated. Here is what the statute says: “…wages (as defined in section 3121(a)) for the preceding calendar year from the employer sponsoring the plan exceed $145,000….”  The quoted language tells us two things. First, to determine the “wages” of a participant, the plan looks to the preceding year. For example, for the first year, 2024, the plan will look to what the participant earned in 2023. Second, the reference to Code section 3121(a) tells us that the definition of “wages” is the one used for Social Security purposes. That may or may not be the same definition that a plan uses for other purposes, so some plans may accidentally trip over this.
• The statute goes on to say that, in order to allow the higher compensated participants to make catch-up contributions (that must be Roth), the plan must allow all eligible participants to make Roth catch-up deferrals. In other words, the plan must permit Roth catch-up contributions for all older eligible participants. Implicit in that provision is that, if a plan sponsor doesn’t want to allow for Roth accounts, participants making over $145,000 cannot be allowed to make catch-up contributions. As a result, plan sponsors who do not currently allow for Roth accounts in their plans will need to consider amending their plans to allow those accounts beginning in 2024 (if they want to allow their higher compensated employees to make catch-up contributions). Plans do not need to be amended for SECURE Act 2.0 changes until 2025, but they must be operated in accordance with the Act’s provisions even before their plans are amended.
• Beginning after December 31, 2024, the $145,000 will be adjusted annually for increases in cost-of-living.

Concluding Thoughts

The SECURE Act 2.0 is complex and, in many ways, demanding. While larger plan sponsors may have the internal resources to understand the changes and to comply, most mid-sized and smaller employers will need help from their advisors, consultants and providers. This provision is one example of that.

Since this provision becomes effective on January 1, 2024 (for calendar year plans), plan sponsors need to be educated about this new requirement and make decisions by September or October, so that coordination can be done with the providers and participants can be educated about the changes before the new year starts.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

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