IRS Issues Final SECURE 2.0 Roth Catch-Up Rules for High Earners
By Lisa Haberman, Ed.D., QKA, ChFC, CLU
The Internal Revenue Service (IRS) recently released final regulations that provide insight on how to administer the catch-up contribution requirements under the SECURE 2.0 Act of 2022 (SECURE 2.0). The final regulations clarify proposed regulations that were released in January 2025. This article provides an overview of the IRS’ final regulations on changes to Roth catch-up contributions for high-earning employees, detailing new requirements, eligibility rules, and employer responsibilities for retirement plan participants.
Key SECURE 2.0 Changes to Catch-Up Contributions
The SECURE 2.0 changes include requiring certain higher-earning participants to make their catch-up contributions as Roth deferrals. There’s also an optional provision for employers to increase the catch-up limit for individuals aged 60-63 (Section 109) and another provision that permits higher contribution limits for those 50 and older who participate in certain SIMPLE 401(k) and SIMPLE IRA plans offered by small businesses (Section 117).
What are catch-up contributions and who can make them?
Participants age 50 and older may make additional elective deferral contributions, known as catch-up contributions to retirement plans, including 401(k), 403(b), and governmental 457(b) plans (plan permitting). For 2025, the catch-up limit is $7,500, and contributions can be made as pretax or Roth deferrals depending on plan design.
Who must make catch-up contributions as Roth deferrals?
Participants whose prior-year Federal Insurance Contributions Act (FICA) wages exceed $145,000 (indexed annually) must make catch-up contributions on a Roth basis. These participants are known as highly paid individuals (HPIs). This rule applies to 401(k), 403(b), and governmental 457(b) plans, but not to SEP plans or SIMPLE IRAs. While the final regulations technically take effect for tax years starting January 1, 2024, the IRS has granted a two-year grace period. So, for 2024 and 2025, employers can still accept pretax catch-up contributions from HPIs without violating the new requirement.
How is the Roth catch-up wage threshold determined?
To determine whether a participant is subject to this rule, employers must review the participant’s Social Security wages reported in Box 3 of Form W-2, Wage and Tax Statement, for the prior year. This rule does not apply during the participant’s first year of employment, but may apply the following year based on the participant’s earnings. Starting in 2025, the income threshold will adjust for inflation in $5,000 increments, with the first update affecting 2027 contributions.
What happens if an employer does not offer Roth elective deferrals?
The final regulations state that employers that already allow pretax catch-up contributions do not have to add a Roth deferral option. But if there is no Roth contribution option available, the plan’s HPIs will not be able to participate—their catch-up limit will be zero.
Are there nondiscrimination concerns with Roth catch-up contributions?
Although employers are not obligated to provide a Roth deferral option to participants, the absence of such an option could result in the plan failing to meet the nondiscriminatory availability requirements for benefits, rights, and features as outlined in IRC Sec. 401(a)(4). For instance, this scenario may occur when an individual is designated as a highly compensated employee (HCE) based on ownership or attribution of ownership, rather than prior year compensation. In such circumstances, the HCE's wages from the preceding year may be below the Roth catch-up wage threshold, while a non-highly compensated employee (NHCE) may have prior year FICA wages that exceed this threshold, but still fall beneath the IRC Sec. 414(q) limit used in determining HCE status.
Can employers automatically treat catch-up contributions as Roth?
Yes, the final regulations state that employers can now automatically treat certain catch-up contributions as Roth contributions. This process is known as a "deemed Roth election." If an HPI makes catch-up contributions, the employer may automatically designate these contributions as Roth—even if the HPI was previously making pretax contributions. For this to happen, all deemed Roth catch-up contributions must be included in the participant’s taxable income and kept in a designated Roth contribution account within the plan. The final regulations also specify that for an employer to implement a deemed Roth election for an HPI, the HPI must have an effective opportunity to make a new election that is different than the deemed election. This approach ensures that participants have flexibility and transparency, while helping employers comply with the new IRS requirements. The deemed Roth election must also be explicitly detailed within the plan document.
What is a Section 414(v)(7) failure?
The failure to treat an HPI’s catch-up contribution as a designated Roth contribution is called a “Section 414(v)(7) failure”. To prevent this, the plan document must clearly state how a participant’s contributions will be calculated when determining if any catch-up contributions need to be classified as Roth. For instance, employers can choose to count only pretax contributions, or to include both pretax and Roth contributions when determining whether catch-up contributions should be treated as Roth.
How do employers correct a Section 414(v)(7) failure?
The final regulations require employers to correct a Section 414(v)(7) failure by using one of two approved correction methods (unless an exception applies). These correction methods are available only to employers that have the deemed Roth catch-up election in place for their plan.
IRS Form W-2 Method. This method is available only if Form W-2 has not been filed or provided to the HPI. This correction method requires the employer to
transfer the catch-up contribution (adjusted for earnings) from a pretax deferral account to a designated Roth deferral account in the plan, and
report the catch-up contribution (excluding earnings) as a designated Roth deferral on Form W-2 for the year that the contribution was withheld.
In-Plan Roth Rollover (IRR) Method. An employer can allow IRR corrections for Section 414(v)(7) failures, even if IRRs are not permitted in the plan document. This corrective method is completed by
directly rolling over a catch-up contribution (adjusted for earnings) from a pretax deferral account to a designated Roth deferral account, and
reporting the IRR for the year that the rollover was completed on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
Are there exceptions to the correction requirement?
Yes. Corrections are not required for de minimis amounts under $250, or if an amended Form W-2 is issued after the correction deadline. Employers must have procedures in place to ensure compliance.
For comprehensive information regarding the IRS final regulations on the SECURE 2.0 catch-up provisions, please refer to the complete Washington Pulse article recently published on ascensus.com.
