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Key Takeaways
- The Secure 2.0 Act changes the requirements for employees making catch-up contributions to a retirement plan. Individuals with more than $145,000 of compensation in the preceding year must make applicable catch-up contributions to a Roth plan.
- The original effective date of this requirement was January 1, 2024; however, this has been delayed to January 1, 2026.
- Applicable plan participants may make catch-up contributions before the change is effective in 2026, regardless of income.
The Secure 2.0 Act of 2022, which is part of the Consolidated Appropriations Act, made a number of law changes allowing taxpayers additional options to increase their retirement savings. While Secure 2.0 included many beneficial provisions, the law places new restrictions on catch-up contributions made to section 401(k), 403(b), and 457(b) plans.
Recent delays have now postponed the effective requirement date from January 1, 2024, to January 1, 2026.
What is a Catch-Up Contribution?
Individuals age 50 or over at the end of a calendar year have an option to make annual catch-up contributions. A catch-up contribution is an amount that exceeds the normal annual contribution limit. In 2023, eligible participants can make catch-up contributions of $7,500 to an employer-sponsored retirement plan (401(k), 403(b), or 457(b), and this amount is adjusted annually for inflation.
Secure 2.0 imposes an income limitation on taxpayers making catch-up contributions to retirement plans. If a taxpayer makes a catch-up contribution and their Social Security wages in the preceding tax year exceeds $145,000, the catch-up contribution must be made to a designated Roth 401(k), 403(b), or 457(b) plan.
Roth contributions are after tax, reducing the tax benefit of a catch-up contribution for higher income taxpayers.
What is the Delay?
The expected effective date for this change was January 1, 2024; however, recently released Notice 2023-62 announced a 2-year administrative transition period until January 1, 2026. According to the notice, the transition period is intended to facilitate an orderly transition for compliance with the new Roth catch-up requirement.
The delay was, in large part, a result of companies requesting more time to update their payroll systems and to implement a Roth option for their retirement plans. Currently, employer plans are not required to provide a Roth option, and without a Roth option, employees would not be able to make catch-up contributions to their employer’s plan.
The delay also allows the Treasury and IRS an opportunity to provide additional guidance on the change, including:
- The effect of self-employment income on the new catch-up contribution requirements.
- An option for all retirement plan participants to make Roth catch-up contributions.
- Contribution requirements for taxpayers with multiple employers.
Before the Roth catch-up requirement becomes effective in 2026, plan participants who are age 50 and over may make catch-up contributions to traditional or Roth retirement plans, regardless of income.
Are There Additional Changes to Catch-Up Contribution Limits?
- Effective in 2025, for employees ages 60-63, the limit on catch-up contributions to 401(k), 403(b), and 457(b) retirement plans will be increased from $7,500 to the greater of either $10,000 or 150% of the regular catch-up amount for 2024. For SIMPLE plans, the limit will be increased to the greater of $5,000 or 150%. Both amounts will be indexed for inflation after 2025.
- Effective 2024, the IRA catch-up contribution amount will be indexed for inflation. In 2023, the catch-up contribution amount is $1,000.
Secure 2.0 includes many more changes that affect both individuals and employers. Eide Bailly can help you navigate these changes and determine how they will affect you.