The proposed rule incorporates and expands on guidance issued in 2023.

Comments are due by March 14, 2025.

Background

Participants in 401(k) and 403(b) plans are permitted to make elective contributions. These elective contributions include elective contribution and catch-up contributions. Catch-up contributions are additional elective contributions participants can make to their 401(k), 403(b) or governmental 457 plans if they are at least 50 years old. SECURE 2.0 added a special additional age 60–63 catch-up contribution opportunity, effective for the 2025 calendar year.

SECURE 2.0 also requires that participants with FICA wages exceeding $145,000 (as indexed for 2024), for the prior calendar year from the current employer, make all catch-up contributions (both the age 50 and the new age 60) as Roth contributions. The Roth requirement was included to raise revenue to pay for other elements of SECURE 2.0.

SECURE 2.0 made the Roth requirement effective for 2024. However, implementing the provision raised many administrative issues, including the need for coordination between an employer’s payroll system and the plan’s recordkeeping system. To provide time to address these problems, in Notice 2023-62, Treasury delayed the effective date of the Roth requirement to the 2026 calendar year by classifying 2024 and 2025 as “administrative transition periods.” (We discussed that guidance in our August 30, 2023 insight.)

The proposed Roth rules

The proposed rules address FICA wages, special rules for multiemployer plans, correction methods and other issues.

FICA wages

FICA wages are wages subject to old age, survivors and disability Social Security taxes. The proposed rule clears up a number of questions about the FICA income test:

• Anyone not subject to FICA wages, such as partners and sole proprietors, is not subject to the Roth limitation.
• Some governmental employees also are not covered by Social Security and thus have no FICA wages.
• The test is for the prior year and is on an employer-by-employer basis.
• No controlled group test applies for purpose of determining the employer.
• There is also no annualization of compensation for the first year of employment.
  
  

Multiemployer plans

In the case of a multiemployer plan, the proposed rule applies the FICA wages test separately for each employer. There is no aggregation of employers even if a person works for two employers who are contributing employers for the plan in the same year or successive years.

For example, assume an employee who works for Employer A, a contributing employer to the plan, earns $145,000 in year one, and also works for Employer B, also a contributing employer to the same plan, earning $100,000 in the same year one. The employee would be subject to the Roth restriction in year two if they work even one hour for Employer A in year two. However, if they do not work for Employer A at all in year two but do work for Employer B in year two, they would not be subject to the Roth restriction in year two even if they earned $145,000 or more from Employer B in year two.

Correction methods

The proposed rule includes two special correction procedures, in addition to the IRS’s Employee Plan Compliance Resolution System (EPCRS), for situations where a catch-up contribution was not made as a Roth contribution by an employee who could only make Roth catch-up contributions.

One method would provide for transferring the contribution to the Roth account and reporting it (without earnings or loss) on the Form W-2. This method is available only if the Form W-2 had not yet been furnished or filed.

The second available method would be to treat the transfer as an in-plan rollover from the elective account to the Roth account. The amount would be reported (adjusted for gain or loss) on Form 1099-R for the year of the rollover. Plans would have to have certain practices and procedures in place, including a Roth program, to use these special correction methods. The deadline for correcting the mistake depends on the type of mistake and is governed by existing correction deadlines.

Other rules

A plan is not required to include a Roth contribution program.

If a plan makes a Roth contribution program available to any employee, the plan must make the Roth program available to all employees (even those whose FICA wages do not exceed $145,000).

If a plan does not include a Roth catch-up contribution provision, the plan, notwithstanding the general universal availability rule, can provide that only those not subject to the FICA restriction can make pre-tax elective catch-up contributions. In addition, the plan may exclude highly compensated employees not subject to the FICA restriction from making pre-elective, catch-up contributions if necessary to pass the coverage nondiscrimination test.

A plan may count a contribution as a Roth contribution even if the contribution is made prior to the time that the employee’s contributions exceed the regular elective contribution limit.

Age 60–63 contributions

A plan may, but is not required to, allow participants who attain ages 60, 61, 62 or 63 in a calendar year to make additional catch-up contributions. The increase is 50 percent of the applicable catch-up amount. In total, a participant who meets the age requirement can contribute 150 percent of applicable amount. The applicable amount in 2025 is $7,500, so 150 percent is $11,250. The applicable amount is increased each year by a cost-of-living index.

Applicability dates

The statutory Roth requirement is effective starting January 1, 2026, because of the special administrative delay. In the case of a collective bargaining agreement, there is a special rule that delays applicability of the final rule (but not the statutory requirement) until the later of the general rule (six months after the issuance of the final rule) and the first calendar year that begins after the date on which the last collective bargaining agreement related to the plan that is in effect on December 31, 2025 terminates (determined without regard to any extension of the agreements). However, like the age 60–63 rule, a plan is permitted to rely on the proposed rule.

The age 60–63 catch-up contribution provision is effective in 2025 and the contributions may be made as elective or Roth contributions. However, starting in 2026, the Roth rules apply to employees with FICA wages (for the prior year from the current year employer in excess of $145,000, as indexed). While the final rule is not effective until the first taxable year starting six months after the final regulation is issued, plans may rely on the proposed rule immediately.

What’s next

One reason for the administrative delay of the Roth rule was the need for coordination between payroll and recordkeepers, and the updating of computer systems. Plan sponsors had hoped that proposed rules would be issued much earlier so that final rules would be out early in 2025. That did not happen. Plan sponsors cannot wait for final regulations to get systems in order.

In addition, the Roth requirement could be confusing to participants. Plan sponsors may wish to review and revise participant communications as needed.