Earlier this year, the SECURE Act 2.0 was signed into law by President Biden. With several important, mandatory provisions going into effect on January 1, 2024, the entire industry is feeling the urgency to create a compliant path forward with new processes, procedures, and employee communication.

Here, we’ll focus on two particularly noteworthy SECURE provisions: Roth Catch-Up Contributions and the Long-Term Part-Time Employee provision from SECURE 1.0 that is still in effect. While we still await official guidance, please check back for updates. If you’d like to take a deeper dive, click here to download the eBook.

What is a catch-up contribution?  

In 2023, the maximum individual contribution to a 401(k) plan is $22,500, referred to as the “standard contribution.” Participants over 50 can make an additional “catch-up contribution” of $7,500 (IRC 414(v)). When combining both contributions, the total maximum 401(k) contribution from pay is $30,000.

What is changing?

January 1, 2024, if you make more than $145,000 in 2023 and wish to make a catch-up contribution in 2024, the catch-up contribution can only be made as a Roth contribution (your standard contribution, however, can still be made as either a pre-tax or Roth contribution).

Time Period + Employer Details

The $145,00 in compensation is earned in the prior year by the employer sponsoring the 401(k) plan. For example, if you make more than $145,000 this year (2023) and are with the same employer next year (2024), your catch-up contribution must be a Roth contribution.

However, if you make more than $145,000 this year with your current employer but switch to a new employer on January 5, 2024, even if your salary with that new employer is greater than $145,000, your catch-up contribution into the new employer’s plan in 2024 could be made as either a pre-tax or Roth contribution.

This is an important point for employee education as you could potentially have two employees, both of whom make well above $145,000, but only one is required to make their catch-up contribution as a Roth contribution.

What compensation is part of the $145,000?

Section 603 states that compensation that needs to be considered is “…wages (as defined in section 3121(a)) for the preceding calendar year from the employer sponsoring the plan…” which tells, by the reference to Code section 3121(a), that the definition of “wages” is the one used for Social Security purposes (wages subject to FICA, i.e., W-2 box 5 Medicare taxable wages).

This may be different from the compensation definition used in your plan. For example, it is common for plans to use W-2 compensation; however, contributions or other items may need to be added back into that W-2 compensation to arrive at the gross compensation subject to FICA.

Not adhering to a plan’s compensation definition ranks among the top 10 compliance failures the IRS sees in its correction program. That said, the inclusion or exclusion of other forms of compensation, such as partnerships, self-employment income, etc., remains uncertain at this time.

How are recordkeepers preparing?

Many recordkeepers are notifying their clients that their systems may not be fully prepared to handle this provision by January 1. Currently, the solution is for clients to create a spreadsheet listing employees who earned over $145,000 in 2023. This spreadsheet must be provided to the recordkeeper before January 1 to “flag” accounts for the 2024 plan year.

Some recordkeepers suggest contacting payroll providers for a report, but some major providers may wait for additional guidance. As a precaution, plans should confirm with their payroll provider to ensure access to the necessary report. If not available, a new procedure for gathering information should be established, considering the holiday season surrounding the deadline.

What if I don’t currently allow Roth contributions or decide not to remove Roth contributions?

If you want to continue allowing people to make catch-up contributions, your plan will most likely need to allow for Roth contributions. Many plans still do not allow these contributions, so setting the source up effective January 1 will need to happen soon. By extension, if you decided to remove Roth contributions, your plan would likely be unable to allow catch-up contributions due to the universal availability requirement.

It is important to note that the rules from SECURE 1.0 (Section 112) pertaining to long-term part-time employees remain in effect, regardless of the changes brought by SECURE 2.0 (Section 125), which reduced the time period from three consecutive years to two.

With SECURE 1.0, if you have employees that have worked more than 500 hours for three consecutive years (2021, 2022, and 2023), they need to be permitted to enter the 401(k) portion of your plan on January 1^, 2024. You do not, however, need to offer them employer contributions unless they meet those eligibility rules.

Regarding excluded employees, there are two types: class exclusions and service exclusions. Class exclusions, such as “all Carlsbad office employees are excluded,” can continue as is. However, service exclusions, like “all temporary workers who work less than 750 hours,” may now require inclusion in the plan starting January 1, 2024.

Moving forward, under SECURE 2.0, the time reduces to two consecutive years. Employees who work more than 500 hours for two consecutive years (2023 and 2024) become eligible for the 401(k) plan on January 1, 2025. Class and service exclusion rules, as well as employer contribution rules, remain applicable.

To prepare for Roth catch-up contributions, plans should closely follow communications from their recordkeeper and promptly contact their payroll provider to finalize the year-end process for flagging accounts. Additionally, plans should understand how contribution elections are managed in their current plan and anticipate changes for impacted accounts starting January 1, 2024. Once further guidance is available, educating plan participants with timely reminders before the new year is recommended, particularly for those requiring action.

Most plans are likely well-informed about the Long-Term Part-Time Employee provision of SECURE 1.0 and its impact on their plan. However, those without a clear understanding should review their eligibility provisions and exclusion rules to identify eligible employees who may need to join the plan on January 1, 2024. These individuals might not be in the recordkeeping system, necessitating proper setup and timely plan disclosures.

Until we receive official guidance or the rule changes are delayed, plans should proactively prepare and act to maintain compliance with the regulations.

Please note: this article is for informational and educational purposes only and does not constitute legal, accounting, or tax advice. Information was from sources believed to be reliable but is not guaranteed to be accurate or complete, and the opinions expressed are subject to change without notice.