IRS issues final regulations on catch-up contributions

On September 16, the IRS issued final regulations regarding changes to the catch-up contribution rules made by the SECURE 2.0 Act of 2022 (“SECURE 2.0”). The regulations address enhanced catch-up contributions for participants attaining age 60-63, as well as the mandatory Roth catch-up provisions that apply to highly paid participants. Both the age 60-63 catch-up and mandatory Roth catch-up provisions apply to 401(k), 403(b), and governmental 457(b) plans. In this article, we’ll focus specifically on the mandatory Roth catch-up provisions.

First, some background

SECURE 2.0 provides that catch-up contributions must be made on a Roth basis if a participant has FICA wages exceeding $145,000 (to be indexed for inflation) in the prior year. For purposes of this article, these participants are referred to as highly paid participants, or HPP.

The mandatory Roth catch-up contribution rules were to be effective January 1, 2024; however, the IRS effectively delayed the new rules until years beginning on or after January 1, 2026. In the final regulations, the IRS specifically stated it was not extending the new mandatory catch-up rules beyond 2026.

Changes made by final regulations

Key changes made by the final regulations aimed at providing administrative flexibility include the following:

• Aggregating compensation from common paymasters/related employers. Under the proposed regulations, if a participant works for multiple employers, the participant’s compensation from the different employers was not aggregated to determine if the participant was an HPP. However, the final regulations allow (but do not require) employers to aggregate compensation from other employers that use a common paymaster, or from related employers, to determine the participant’s HPP status.
• Changes to in-plan Roth rollover contribution correction method. If an HPP inadvertently makes pre-tax catch-up contributions, this is a failure that must be corrected. The proposed and final regulations allow the failure to be corrected through an in-plan Roth rollover contribution by transferring the improper pre-tax catch-up contributions (plus earnings) from the HPP’s pre-tax deferral account to the HPP’s Roth deferral account if certain conditions are met. The final regulations clarify that this correction method is available even if a plan does not otherwise allow in-plan Roth rollover contributions.
• Expiration of deemed Roth election. Both the proposed and final regulations allow plans to implement a deemed Roth catch-up contribution feature. Accordingly, if an HPP elects to make deferrals on a pre-tax basis, and some of those deferrals are catch-up contributions, then the improper pre-tax catch-up contributions can be deemed to be Roth catch-up contributions (if certain conditions are satisfied). The final regulations, however, prohibit the deemed Roth election to apply to a participant within a reasonable time after they cease to be an HPP, or if an amended W-2 indicates the participant is no longer an HPP.

Compliance dates and next steps

The final regulations apply for years beginning on or after January 1, 2027. For the 2026 year, plan sponsors must implement the new rules, using a good faith interpretation of SECURE 2.0’s statutory provisions.

We’re reviewing the final regulations and expected to provide our pre-approved plan clients with employer and participant communications, documents, and election forms in October designed to comply with the final regulations.

If you have any questions about the final regulations, please contact your UBT Retirement Plan Services Relationship Manager and we’ll be happy to help.