SECURE Act 2.0: Changes to Catch-up Contributions for Those 50 years and over

SECURE Act 2.0 – Impacts to Catch-up Contributions

Key Takeaways

• The SECURE Act 2.0 requires that catch-up contributions for higher compensated participants be treated as Roth deferrals.
• This provision is effective for tax years beginning after December 31, 2023 (that is, in 2024 for calendar year taxpayers).
• Unfortunately, due to a drafting error in the legislation, the provision in the Code that permits catch-up contributions is repealed beginning in 2024. But technical corrections legislation may correct that.

There is a LOT to cover with SECURE Act 2.0. Do you realize it has over 90 provisions!

So where do we begin?!

One difference between the SECURE Act 2.0 and previous acts is that so many of the provisions are optional…that is, you as plan sponsors are not required to adopt the provisions, but gives you the power to include them in your plan if you conclude that the change will help improve your retirement plan and help your employees.

Catch-up Contributions

Catch-up contributions for participants who earn over $145,000 (indexed) must be treated as Roth deferrals (contributions will be after-tax, but the withdrawals of those contributions will be tax-free and, if the Roth conditions are satisfied, the withdrawals of earnings will also be tax-free). Remember, RMD rules do not apply to Roth accounts (and, as a result, withdrawals from Roth accounts can be deferred indefinitely until the money is needed).

Unfortunately, in the process of drafting the legislation, a mistake was made…the provision in the Internal Revenue Code that permits catch-up contributions was accidentally repealed. Unless that is corrected, no catch-up deferrals will be permitted after 2023. In a reasonable world, there would be a technical corrections act in 2023 and the problem would be taken care of. However, it remains to be seen if Congress will be reasonable on this issue in light of the fights about budgets, taxes and expenses.

Closing remarks on Secure Act 2.0

• Of those 90 provisions, some are major and some minor… some mandatory and some optional… some retroactively effective and some that won’t be effective for years to come.
• I want you to know about the possibility that catch-up contributions will not be permitted in 2024 (although they are allowable this year). So stay tuned.
• In turn, participants who are higher paid need to be told about the new Roth treatment (in 2024) for their catch-up deferrals—in case Congress does pass technical corrections legislation to fix its drafting error and catch-up contributions are permitted in 2024 and thereafter.
• Since higher earning older participants are likely in high tax brackets, it may not make sense for many of them to make catch-up deferrals as Roth contributions. (Generally speaking, the tax treatment of Roth contributions works best when the Roth deferrals are made in lower income years and the money is later withdrawn in higher income years. For some, perhaps many, older high earning executives and managers, catch-up contributions will be made in higher income—and therefore tax bracket—years and withdrawn in lower income years in retirement.)

Retirement Partners Can Help

SECURE Act 2.0 is more comprehensive than what is outlined above, but these are some of the key areas of interest that could impact businesses. Retirement Partners of CA can be utilized to help your business take advantage of implementing and managing a retirement plan.