Mandatory Catch-Up Contribution “Rothification” Is Coming to U.S. Savings Plans

Section 401(k) retirement plans may allow participants who are age 50 or older to make additional elective deferrals, known as “catch-up” contributions. The SECURE 2.0 Act added a requirement that highly compensated participants (i.e., those who earn in at least $145,000, as indexed) must make catch-up contributions as Roth contributions, not as pretax contributions. Amounts contributed as Roth contributions are includible in gross income in the year of the contribution, but distributions from the account, including earnings, generally are tax-free. This requirement was originally due to take effect in 2024 but was delayed until 2026 due to concerns that plans and service providers could not change their administrative and recordkeeping procedures in time to comply.

Guidance on Rothification Requirements Applicable to Catch-Up Contributions

The U.S. Internal Revenue Service recently introduced proposed regulations to provide additional guidance on how to implement this Roth catch-up contribution requirement. The following is a summary of this new guidance regarding the Rothification requirement applicable to highly compensated participants’ catch-up contributions.

Who is affected?

The Roth requirement for catch-up contributions applies only to 401(k), 403(b), and 457(b) government plan participants who earned more than $145,000 in Federal Insurance Contributions Act (FICA) wages (adjusted for inflation) during the prior taxable year from the employer sponsoring the plan (higher earners). This does not include participants who have no FICA wages, such as persons earning income only from self-employment.

How does the mandatory catch-up contribution Rothification requirement affect high earners’ standard elective deferrals?

This Rothification requirement does not affect participants’ standard (non-catch-up) elective deferrals. Individual plans can continue to determine whether participants can make pretax or Roth-based contributions for non-catch-up deferrals. The Roth requirement applies only to higher earners’ contributions that exceed the Internal Revenue Code’s (Code’s) standard elective deferral limit.

Can standard deferral elections be Rothified to satisfy the requirements?

Yes. Amounts up to the Code’s standard elective deferral limit are not required to be made on a Roth basis, but if a high earner chooses to contribute on a Roth basis, such Roth amounts may be counted toward the Rothification requirement applicable to catch-up contributions. If a higher earner’s Roth-elected contributions aggregated over the course of the entire taxable year equal the required Roth amount, the requirement is satisfied.

Will a plan fail nondiscrimination testing if it does not provide a Roth catch-up contribution feature?

In general, a plan will not satisfy the Code’s nondiscrimination unless the plan allows all catch-up-eligible participants to make the same dollar amount of catch-up contributions under the plan. However, the proposed regulations provide that a plan will not fail the nondiscrimination requirements for not allowing participants above the Rothification threshold to make catch-up contributions, even if participants below the applicable threshold are still able to make pretax catch-up contributions.

Under the proposed regulations, a plan is not required to include a qualified Roth contribution program, but a participant who is subject to the mandatory Roth catch-up provision cannot make any catch-up contributions under a plan that does not include a qualified Roth contribution program. 

How does the mandatory Rothification requirement affect super catch-up contributions?

Under SECURE 2.0, participants attaining ages 60-63 during the taxable year may make additional tax-preferred contributions to their retirement savings, known as “super catch-up contributions.” Higher earners must follow the Rothification requirement for both catch-up and super catch-up contributions.

What actions should plan sponsors take now?

Plan sponsors should

• develop processes to (1) identify participants who will be subject to the new Rothification requirement, (2) track FICA wages, and (3) implement the deemed Roth catch-up elections; and
• work with counsel to ensure plan documents, employee communications, and summary plan descriptions reflect these new Rothification requirements