The Setting Every Community Up for Retirement Enhancement 2.0 Act, which we will call SECURE 2.0, became law in late 2022.

SECURE 2.0 is the sequel to the original SECURE Act, which became law back in 2019. SECURE 2.0 includes a bevy of mostly taxpayer-friendly changes, including one that enhances the limits for retirement account catch-up contributions if you are age 60 to 63.

Being able to make extra catch-up contributions allows you to pump up your tax-favored retirement savings program and thereby increase the odds that you will have enough money stashed away to get by in your retirement years–a noble goal to be sure.

SECURE 2.0 includes another catch-up contribution change that can affect higher-income folks, and that’s one you are not likely to embrace. Fortunately, the IRS has responded to tons of pushback from all corners and has postponed that change’s effective date, as we explain later.

This article gives you the updated story on the SECURE 2.0 changes for catch-up contributions. But first let’s cover the necessary background information.

Catch-Up Contribution Basics

Employer-sponsored 401(k), 403(b), and 457(b) plans can allow participants who are age 50 or older to make additional salary reduction contributions–also known as “elective deferral contributions”–to their accounts.

These so-called catch-up contributions are over and above standard salary reduction contributions, which are limited to $22,500 for 2023, with inflation adjustments for later years. For 2023, the maximum catch-up contribution to one of the aforementioned plans is $7,500, with inflation adjustments for later years.

If you participate in a SIMPLE IRA plan, the standard maximum deductible salary reduction contribution for 2023 is $15,500, with inflation adjustments for later years. For 2023, the maximum SIMPLE IRA catch-up contribution for participants who are age 50 or older is $3,500, with inflation adjustments for later years.

The advantage of making these catch-up contributions is that they reduce your taxable salary–or your taxable income if your plan is for a self-employed sole proprietor—while also allowing you to put more into your tax-advantaged retirement account.

SECURE 2.0 Change Permits Bigger Catch-Up Contributions for Some–Starting in 2025

Starting in 2025, for retirement plan participants who attain age 60 through 63 during the year, SECURE 2.0 increases the maximum catch-up contribution to the greater of (1) $10,000 (as adjusted for inflation) or (2) 150 percent of the maximum “regular” catch-up contribution amount allowed for 2024. (2024 is not a typo.)

Starting in 2025, for SIMPLE IRA participants who attain age 60 through 63 during the year, SECURE 2.0 increases the maximum catch-up contribution to the greater of (1) $5,000 (as adjusted for inflation) or (2) 150 percent of the maximum “regular” catch-up contribution amount allowed for 2025. (2025 is not a typo.)

To be clear, these super catch-up contributions will be allowed only if you reach age 60, 61, 62, or 63 during the year in question. If you are not within that age window for the year in question, the “regular” catch-up contribution maximums mentioned earlier ($7,500 and $3,500 for 2023, with inflation adjustments for later years) will apply to you.

Controversial SECURE 2.0 Change Would Target Catch-Up Contributions for Higher-Income Participants

Now we address the controversial SECURE 2.0 change that was supposed to take effect in 2024. It generated so much pushback that the IRS postponed the effective date.

Under the controversial change, participants in employer-sponsored 401(k), 403(b), and 457(b) plans whose prior-year FICA wages exceeded $145,000 (as adjusted for inflation) would be allowed to make catch-up contributions only to a designated Roth account established by the plan.

Designated Roth account contributions are after-tax, so they don’t reduce your taxable wages. On the plus side, designated Roth account balances can grow federal-income-tax-free, and qualified distributions taken from designated Roth accounts are federal-income-tax-free. A qualified distribution is one that

• occurs at least five years after your first contribution to the designated Roth account and
• is made after you reach age 59 1/2 or due to disability or death.

To be clear, if your employer’s plan does not offer the designated Roth account option and your prior-year FICA wages exceed $145,000 (as adjusted for inflation), this change would eliminate your ability to make any catch-up contributions.

Key point. If you are a partner or sole proprietor with a solo 401(k) plan, you don’t receive FICA wages and this change won’t apply to you.

Concerns about the Designated Roth Account Change

Not all employees will welcome the rather drastic designated Roth account change to the catch-up contribution regime. And the looming 2024 effective date for the change and the various administrative hurdles it would erect have caused much angst for employers and payroll service providers. For instance:

• Employers must identify which employees have wages above the $145,000 threshold and must provide that information to plan administrators.
• Procedures must be established to restrict catch-up contributions by affected employees to designated Roth accounts, and details about how the new deal works must be communicated to affected employees.
• Finally, some employer plans don’t currently offer the designated Roth account option, which affected employees will likely demand. These employers will probably need to amend their plans to avert employee discontent. Without such amendments, affected employees will be unable to make any catch-up contributions. But with such amendments, all employees would have the option of contributing to designated Roth accounts, which will create more administrative complications.

Shock! IRS Grants Much-Needed Transition Relief
In Notice 2023-62, the IRS reacted to the aforementioned concerns by granting relief in the form of a so-called administrative transition period.

Under the transition period relief, the effective date for the designated Roth account catch-up contribution change is extended to January 1, 2026. Until then, we can ignore the change, and you can continue making catch-up contributions. In other words, the status quo will prevail for 2024 and 2025. Good!

Side note. In Information Release 2023-155, the IRS addressed an embarrassing drafting glitch in the SECURE 2.0 statutory language that seemed to eliminate entirely the ability to make any catch-up contributions after 2023.

IR-2023-155 states that you can continue to make catch-up contributions in 2024 and beyond if you are age 50 or older. Presumably, the faulty statutory language will be fixed as part of a future technical corrections bill.

Takeaways

Take the bad with the good. The tax-saving catch-up contribution privilege is good for those who can take advantage.

The delayed effective date for the controversial designated Roth account catch-up contribution change is good news. We have some time to figure out how to make it work.

But the change is still scheduled to kick in on January 1, 2026. If you operate a 401(k) plan for employees, you are probably well-advised to get started sooner rather than later on procedures and plan amendments, if necessary, to achieve compliance with the change.

Ignoring all the administrative hassles that might be associated with having your 401(k) plan offer the designated Roth account option, the option is probably a good one for higher-income employees … including you!