One of the more ambitious (from a timing standpoint) provisions when SECURE 2.0 was signed into law in late-December 2022 was the provision requiring all participants above a certain income level to make catch-up contributions as Roth contributions.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 marked significant strides in improving retirement savings accessibility, introducing various incentives aimed at expanding retirement coverage and simplifying plan administration. Building upon this, the SECURE 2.0 Act of 2022 sought further enhancements, notably mandating that catch-up contributions for higher-income earners be made as Roth contributions, scheduled originally to begin just 12 months later in January 2024. This Roth catch-up requirement was designed not only to encourage participants to strategically leverage Roth savings for potential long-term tax advantages but also to boost federal revenue. Beginning almost immediately, there were questions from the retirement plan community about the how this was to be implemented and concerns about how quickly payroll and recordkeeping providers could make this update in their technology systems. In late August 2023, recognizing the time needed for system modifications to be made appropriately, the IRS issued guidance delaying the effective date to January 2026.
Catch-up contributions are for employees who are 50 and above. The provision allows them to invest an additional amount ($7,500 in 2025) in their retirement plan above the standard allowed deferral contribution. This is recognizing that many people approaching retirement may prioritize savings differently than when they were younger, as they are likely in better earning years than when first starting their careers. Additionally, they likely have less competition for their spending compared to when they had student loans, were having children, and purchasing homes. While retirement plans have historically allowed for Roth contributions stemming back to the Pension Protection Act of 2006 (PPA), there has not been a mandated contribution type for catch-up contributions until SECURE 2.0.
The new provision requires for employees who are earning $145,000 (indexed) and above in annual income to transition all their catch-up contributions to Roth beginning in 2026. The benefit of Roth contributions, an after-tax contribution source, is that workers have already paid the taxes on the contributions. When taken out of the plan through a qualified distribution, the earnings – which can become considerable – on the Roth contributions are also now tax-free. From a governmental standpoint, Roth contributions can be valuable as there is a tax collection now on the contributions, in exchange for the earnings to potentially be tax-free at a future point, instead of waiting for the tax deferred benefits of pre-tax contributions to begin to be taken from the account and require taxation.
In early 2023, understanding and explaining SECURE 2.0 to plan sponsors was overwhelming as the sheer number of provisions impacting retirement plans (90+) and the lack of clarity made it difficult to decide how to share all the provisions with plan sponsors. Even as Summer 2023 closed and we were made aware of the delay of implementation, we continued to apprise our plan sponsor clients of the provisions, often discussing the provisions that just needed action in order of the effective date. It is no surprise with the deadline for the delay now months away, that plan sponsors are again wanting to discuss Roth catch-up contributions and how they will impact their high-earning, closer-to-retirement aged employees. Set expectations with clients that we anticipate further guidance from the IRS again as the deadline comes closer to revisit the original regulation, which is currently in a comment period after a proposed rule was re-addressed in January 10, 2025.
As we understand it today, from references in late 2024 and the proposed January 2025 regulations, the $145,000 (indexed) limit will remain and will be based on the prior year earnings for only that employer. As with any standard HCE calculation, if an employee was employed by another employer earlier in the prior year, there is no need for an employer to track those earnings. If a plan does not have an existing Roth provision, they will not need to add it but they will not be able to allow those employees to use the existing catch-up contribution provision in the plan. There is no requirement for plan sponsors to add a Roth contribution option unless they want to.
Another consideration that will require guidance includes the usage of corrections. What if an employee is missed and then allowed to make pre-tax catch-up contributions but was over the income limit. The understanding as of today is that an in-plan Roth conversion would need to occur, but what if the plan doesn’t allow for in-plan Roth conversions? Would the catch-up contributions need to be distributed from the plan?
This does introduce an opportunity for advisors, consultants, and plan sponsors to add value through education and preparation despite uncertainty of where this provision will finally land. From the plan administration side, it’s an opportunity to conduct payroll system reviews and potentially evaluate and adjust internal processes. For participant education, this could be conducting a comprehensive evaluation on the employee population, including identifying varying life stage or savings needs with communication strategies, educational pieces, and potentially tax planning conversations with financial planning knowledge. While only a small subset of the entire employee population may be at the age and earning level that will be directly impacted by this change, identifying the upcoming change to them today may give them the proactive time to review, evaluate, and potentially make changes in their savings behavior with a forward-looking perception instead of reactively.
Plan sponsors could also consider having a broader plan-wide group-level education on the general value of Roth features to all employees capturing a variety of participants’ life stages. Ultimately, this preparation period can enhance overall plan readiness, participant satisfaction, and contribute positively to long-term retirement outcomes—turning legislative uncertainty into a strategic advantage. With the implementation of SECURE 2.0 Roth catch-up contributions now delayed until January 2026, advisors, consultants, and plan sponsors have valuable additional time to strategically position themselves, and their participants, for a smooth, informed transition when the provision ultimately takes effect.
Christina Tunison is a Financial Advisor & Retirement Plan Consultant with LPL Financial based in the Washington, D.C. metro area. She has almost twenty years of specialized retirement experience and is dedicated to assisting organization executives manage their role as retirement plan sponsors and help their employees prepare adequately for retirement.
Theresa Conti started Sunwest Pensions in 1998 and sold it to July Business Services in 2023. Theresa also holds many designations including a QKA with ASPPA, APR with NIPA, CPFA with NAPA and an ERPA with the IRS. Theresa also volunteers frequently with many industry associations including ASPPA, NIPA and WIPN along with writing regular articles for Plan Consultant Magazine and speaking engagements at industry conferences. She also serves on the board of Junior Achievement of Arizona and the Fountain Hills Community Foundation.
As Theresa enters the next chapter of her career, she partnered and launched a podcast called “Step into the Pivot” and is now working as a Business Coach with TPA Business Owners, a Life Coach with women in the retirement industry and providing Leadership Training. Theresa will also continue to provide technical knowledge and support to plan sponsors and financial advisors.