New IRS Guidance on Catch-Up Contributions

In yet another reminder of just how many rule changes emanated from SECURE 2.0, the Internal Revenue Service (“IRS”) released proposed guidance on January 10, 2025 regarding certain changes to the “catch-up” rules enacted under SECURE 2.0 (“IRS Guidance”).  As a refresher, section 414(v) of the Internal Revenue Code of 1986, as amended (“Code”), grants plan sponsors the discretion to allow retirement plan participants aged 50 or over to annually defer an extra amount into certain types of retirement plans.  This extra deferral amount is commonly referred to as a catch-up and is indexed for inflation.  The following touches on several noteworthy aspects of the newly proposed IRS Guidance.  However, it is important to recognize that the IRS Guidance remains in proposed form which means that substantive changes could occur before the guidance is finalized.

Super Catch-Ups

For 2025, the pre-existing catch-up rules grant plan sponsors the discretion to allow participants aged 50 or over to defer an extra $7,500.  However, effective for 2025 and subsequent years, SECURE 2.0 expanded this opportunity but only with respect to participants aged 60 to 63.  More specifically, participants who are aged 60 to 63 as of the last day of the year can be allowed to annually defer a larger catch-up amount of up to the greater of $10,000 or 150% of the normal catch-up limitation in place for that year.  The industry has labelled this larger catch-up a “super catch-up” (“Super Catch-Up”).  Applying these rules to 2025, the Super Catch-Up limit for 2025 is $11,250.

One of the primary questions raised in response to the creation of the Super Catch-Up was whether a plan sponsor that allows for catch-ups must also offer Super Catch-Ups.  In other words, does a plan sponsor have the discretion to offer catch-ups but not offer Super Catch-Ups.  The IRS Guidance clarified that, yes, plan sponsors have the discretion to offer catch-ups without being forced to also offer Super Catch-Ups.  With that understanding, the following chart illustrates the maximum catch-up limits for 2025.

Mandatory Roth Catch-Ups

Another section of SECURE 2.0 required that those earning over $145,000 in the prior year indexed for inflation (“High Earners”) only be allowed to make catch-up contributions on a Roth basis (“Mandatory Roth Catch-Ups”).  This change was initially scheduled to take effect in 2024 but was then postponed until 2026 due to implementation concerns as a result of a lack of existing operational guidance on the issue from the IRS.  The IRS Guidance answers many outstanding questions associated with Mandatory Roth Catch-Ups.  The following summarizes some of the most important pieces of the IRS Guidance in this regard.

First, the IRS Guidance confirms that a plan must generally allow participants to make Roth deferrals in order for High Earners to be able to make Mandatory Roth Catch-Ups.  However, it is permissible to only offer pre-tax catch-ups without allowing for Roth contributions.  Thus, if a Plan does not allow for Roth contributions, it could still allow pre-tax catch-ups for non-High Earners but it would not be able to offer any catch-ups whatsoever for High Earners.

Second, the IRS Guidance allows plan sponsors to provide that any High Earner is deemed to have irrevocably designated any catch-up to be a Roth catch-up.  However, if a plan sponsor provides for this deemed election, it must still offer the High Earner an effective opportunity to make an election other than the deemed election.  In other words, the plan sponsor must allow the High Earner to elect to not make any catch-up contributions at all rather than making Mandatory Roth Catch-Ups.

Third, the IRS Guidance clarifies how to measure compensation for purposes of determining whether a plan participant qualifies as a High Earner.  For this purpose, the definition of compensation that must be employed is FICA wages as are otherwise used to determine Social Security income tax liabilities.  Consequently, an individual who had no FICA wages from the plan sponsor for the prior year could not be a High Earner subject to Mandatory Roth Catch-Ups.  Further, the High Earner wage threshold is not pro-rated for an individual’s initial year of employment.  Therefore, an individual who worked for his employer for only part of the preceding calendar year would still need to earn wages that exceeded the full High Earner dollar threshold for that calendar year to be considered a High Earner.

The IRS Guidance also states that the High Earner dollar threshold is determined exclusively by reviewing the FICA wages received by the individual from the “employer sponsoring the plan”.  For this purpose, the “employer sponsoring the plan” is defined as the individual’s common law employer and does not include wages received from “related employers” as determined under the controlled group and/or affiliated service group rules (“Related Employers”).  Thus, in a situation where multiple Related Employers participate in the same plan and a single employee receives FICA wages from more than one of such Related Employers, the determination of whether or not such individual was a High Earner would be calculated independently for each separate entity without aggregating wages from each entity.