Signed into law at the very end of 2022, the SECURE 2.0 Act of 2022 (SECURE Act 2.0) makes far-ranging changes to the US employer-retirement plan system. Continuing momentum and themes from earlier legislation (notably, the Setting Every Community Up for Retirement Act of 2019 (SECURE 1.0)), SECURE Act 2.0 makes changes that are intended to expand access to retirement plans and encourage savings by US workers. While our initial SECURE Act 2.0 LawFlash provided a general overview of its significant provisions, this LawFlash—one of a series of forthcoming deep-dive articles—more closely examines the increased catch-up contribution limits and various Roth-related provisions of SECURE Act 2.0.
SECURE Act 2.0 increases the “catch-up” contribution limit for employees who are age 60-63 and adds a number of Roth-related provisions that likely will lead to the further “Rothification” of employer-sponsored defined contribution retirement plans.
In particular, SECURE Act 2.0
Although these Roth-related provisions increase the portion of employees' retirement savings that are subject to immediate taxation, the additional Rothification may provide welcome flexibility and benefits for some. However, the mandatory characterization of catch-up contributions made by certain high-paid employees as Roth contributions is already drawing comments for being (1) complicated for plans to administer and (2) potentially unfavorable for those employees who want to make catch-up contributions but not on a Roth basis.
In general, catch-up contributions are elective deferral contributions made by eligible participants under an applicable plan (i.e., a 401(k) plan, 403(b) plan, governmental 457(b) plan, SARSEP, or SIMPLE IRA (or SIMPLE 401(k) plan)) that exceed an otherwise applicable statutory or plan limit (most commonly for 401(k), 403(b), and governmental 457(b) plan participants, the 402(g) contribution limit is $22,500 in 2023).
Catch-up contributions are intended to give older employees who may not have contributed to retirement savings during their earliest working years—when they perhaps were lower paid or unable to take advantage of a retirement savings plan—the opportunity to defer additional amounts on a tax-favored basis as they get closer to retirement age. A participant is eligible to make catch-up contributions with respect to any plan year up to a set limit if the participant is, or will be, at least 50 years old by the end of the calendar year. Under current law, the maximum catch-up contribution limit (the Age 50 Catch-Up Limit) applicable to 401(k) plans, 403(b) plans, governmental 457(b) plans, and SARSEPs is $7,500 for 2023 and is subject to cost-of-living adjustments in future years. 
SECURE Act 2.0 further enhances older employees’ ability to accelerate savings as they approach retirement by providing that, effective for participants' taxable years (i.e., the calendar year for most participants) beginning after December 31, 2024, the maximum catch-up contribution limit under applicable plans for eligible participants who would attain ages 60, 61, 62, or 63 (but not age 64) during the year (the Age 60-63 Catch-Up Limit) will increase to the greater of $10,000 or 150% of the Age 50 Catch-Up Limit in effect for 2024 (as adjusted for cost-of-living increases after December 31, 2025). 
Observation: While the new Age 60-63 Catch-Up Limit is generally expected to improve retirement readiness for those employees who are closest to attaining retirement age, it adds new layers of administrative complexity for plans. Currently, plans need only track which deferral-eligible participants are (or will be) age 50 or older by the end of the calendar year. After the Age 60-63 Catch-Up Limit takes effect, plans and recordkeepers will also need to track which participants will attain ages 60, 61, 62, or 63 during the calendar year and ensure that the applicable Age 60-63 Catch-Up Limit is properly applied. Similarly, plans will need to track which catch-up eligible participants will reach age 64 during the calendar year and therefore “age out” of the higher Age 60-63 Catch-Up Limit and again be subject to the Age 50 Catch-Up Limit.
Compounding this additional administrative complexity, plans likely will also want to consider targeted communications for catch-up eligible participants prior to the calendar years in which they will reach age 60 or pass age 63 to help participants understand the limit that will apply to them for a particular year.
Although the new Age 60-63 Catch-Up Limit will not take effect until 2025, given the added complexity, plan sponsors may wish to review the current administration of the Age 50 Catch-Up Limit. They may wish to coordinate with their service providers well in advance of the effective date to establish a communication strategy and ensure any necessary procedural changes and system updates are in place to facilitate the proper application and administration of the updated catch-up limits. In addition, the new Age 60-63 Catch-Up Limit reinforces the need for plans and service providers to have accurate birth dates for plan participants.
Since 2006, eligible retirement plans with elective deferral features (401(k) plans, 403(b) plans, 457(b) plans etc.) have been able to offer participants the opportunity to contribute elective deferrals either on a traditional pre-tax basis or as Roth contributions. Traditional pre-tax contributions are deducted from a participant’s pay before the amounts are included in a participant's taxable income, but both the contributions and any earnings are taxable to the participant at the time of distribution. By contrast, Roth contributions are deducted from a participant’s pay after first being included in a participant's taxable income, but the Roth contributions and any earnings are not taxed at the time of distribution (assuming, with respect to the corresponding earnings, that the distribution is a “qualified distribution” that is made after five years of Roth plan participation and on or after age 59½ or on account of death or disability).
Effective for tax years beginning after December 31, 2023, SECURE Act 2.0 requires that any retirement plan (except a SARSEP or SIMPLE IRA plan) that permits catch-up contributions must treat any catch-up contributions made by certain “High-Paid Participants” as designated Roth contributions. For these purposes, a “High-Paid Participant” is an employee whose wages (as defined in Internal Revenue Code (Code) Section 3121(a)) from the employer sponsoring the plan during the preceding calendar year exceeded $145,000, as adjusted for cost-of-living increases.
Observation: The Rothification of catch-up contributions for High-Paid Participants is mandatory and effectively means that High-Paid Participants may no longer make pre-tax catch-up contributions. Plan sponsors that currently offer catch-up contributions but do not offer Roth contributions will need to add a Roth contribution feature or eliminate altogether the plan's catch-up contribution feature. (SECURE Act 2.0 requires that a plan offering a catch-up contribution opportunity must include the Rothification of catch-up contributions by High-Paid Participants.) As it seems unlikely that many plan sponsors would want to eliminate an existing catch-up contribution feature, the net impact of this SECURE Act 2.0 change is likely to be the expanded availability of Roth contribution features in employer-sponsored plans.
Observation: Mandatory Roth catch-up contributions for High-Paid Participants introduce a host of new administrative issues and complexities for plans. Starting in 2023, plans and service providers will need to establish a process for identifying High-Paid Participants using a compensation definition (wages for purposes of Code Section 3121(a)) that may be different from a plan's existing compensation definition(s) used for determining plan contributions and other compliance purposes. In addition, it is not entirely clear how any new guidance from the Internal Revenue Service (IRS) relating to catch-up contribution elections will interact with existing rules and regulations. The added administrative complexity of the mandatory Rothification will require careful monitoring by plan administrators and recordkeepers to ensure operational compliance and accurate reporting of taxable income for affected High-Paid Participants.
Observation: SECURE Act 2.0 contemplates that the IRS may issue regulations permitting participants to change their catch-up contribution elections if their prior-year compensation is determined to exceed the $145,000 limitation after such elections were made (e.g., if a participant does not realize compensation for the prior year exceeded the limit until a few pay periods into the current year and does not wish to make Roth catch-up contributions). Although this may not be an issue for the majority of plans—most plans permit changes to deferral elections at any time—the explicit instruction to the IRS is an indication that Congress recognizes the complexities associated with the Rothification of catch-up contributions and the potential need for regulatory guidance.
Although the mandatory Rothification of catch-up contributions for High-Paid Participants will not take effect until tax years beginning after December 31, 2023, plans and service providers will need to start work soon to establish procedures for identifying High-Paid Participants, evaluate and potentially update their procedures and processes for Roth and catch-up contribution elections, and prepare for communicating these provisions and procedures to potentially High-Paid Participants and other plan participants.
In addition to the mandatory Rothification of catch-up contributions for High-Paid Participants, SECURE Act 2.0 provides for the optional Rothification of employer matching and nonelective contributions. Specifically, plans may, but are not required to, offer employees the option to elect to treat all or a portion of employer matching or nonelective contributions as designated Roth contributions, provided that such contributions are fully vested when made to the plan.
Employees electing to take advantage of this optional feature would take the value of the employer matching or nonelective contributions into taxable income immediately, but future earnings on the designated Roth contributions would not be taxed if distributed through a “qualified distribution.” This optional Rothification of employer contributions can be made available for fully vested employer matching and nonelective contributions made after the December 29, 2022, enactment of SECURE Act 2.0.
Observation: Under current law, plans may offer an “in-plan Roth conversion” feature, whereby participants may convert previously contributed employer contributions to Roth contributions through one-off elections. SECURE Act 2.0 further extends this optional Rothification of employer contributions by allowing the Rothification to take effect at the time employer contributions are contributed to the plan.
Observation: Employers with plans that contain a vesting schedule (particularly a “graded” schedule that provides for partial vesting of employer contributions over a period of years) will need to consider how and when to offer the Rothification election or, perhaps, whether to make changes in the plan's vesting schedule to facilitate such elections.
Even though the SECURE Act 2.0 provision allowing for the optional Rothification of employer matching or nonelective contributions is effective for all contributions made after December 29, 2022, as a practical matter, it may take time for plans and service providers to scale up to offer this feature. In particular, plans and service providers will need to establish a process for soliciting and processing employees' elections and reporting any Roth-designated matching or nonelective contributions as taxable income. Then, plans will generally need to communicate the availability of this election to employees and provide employees with a reasonable opportunity to make their elections.
Code Section 401(a)(9) contains detailed rules establishing how and when required minimum distributions (RMD) must start being distributed to a participant from a retirement plan or IRA. Currently, under these rules, Roth amounts held in a retirement plan are treated differently from Roth amounts held in an IRA. More specifically, in some circumstances, Roth amounts held in a retirement plan must start being distributed to a participant before the participant's death. By contrast, Roth amounts held in an IRA are not subject to these pre-death distribution rules, and Roth IRA owners are not required to take distributions from their Roth IRAs during their lifetime.
SECURE Act 2.0 conforms the RMD rules for Roth amounts in employer-sponsored retirement plans with the rules for Roth IRAs effective for taxable years beginning after December 31, 2023. As conformed, the pre-death RMD rules (requiring pre-death RMDs) no longer apply to Roth contributions in an employer-sponsored retirement plan. (Note: SECURE Act 2.0 contains a number of other changes related to the RMD rules that we will analyze in a future LawFlash.)
Observation: While SECURE Act 2.0 conforms the RMD rules for Roth amounts in employer-sponsored retirement plans and IRAs, this change does not apply to RMDs that are required for years beginning before January 1, 2024, but permitted to be paid on or after that date.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following:
 SIMPLE IRA and SIMPLE 401(k) catch-up contributions are limited to $3,500 for 2023 (subject to cost-of-living adjustments).
 SECURE Act 2.0 changes apply differently to SIMPLE IRAs and SIMPLE 401(k)s. In particular, the Age 60-63 Catch-Up Limit under SIMPLE plans will increase effective for tax years beginning after December 31, 2024, to the greater of $5,000 or 150% of the Age 50 Catch-Up Limit in effect for 2025. (Note: It is not clear at this time if the reference to 2025 was intentional or if it is an error that will be subject to a technical correction.)