IRS finalizes Roth catch-up contribution rules, clarifies SECURE 2.0 provisions

The Internal Revenue Service has finalized regulations implementing key provisions of the SECURE 2.0 Act, including new requirements for catch-up contributions in workplace retirement plans.

The rules, announced Monday, set out how plan sponsors and administrators must handle after-tax Roth catch-up contributions for higher-earning participants, as well as increased contribution limits for certain age groups.

"The final regulations provide guidance for plan administrators to implement and comply with the new Roth catch-up rule and reflect comments received in response to the proposed regulations issued in January," the Monday IRS announcement read.

Under the final regulations, employees aged 50 and older with prior-year wages above $145,000 – adjusted annually for inflation – will be required to make catch-up contributions on a Roth basis starting in taxable years after December 31, 2026.

This threshold applies to wages subject to FICA taxes, and the rules allow employers in a controlled or affiliated service group to aggregate compensation across multiple entities when determining eligibility.

The SECURE 2.0 Act, passed in 2022, originally set the Roth catch-up requirement to take effect for tax years beginning after 2023. However, the IRS postponed the compliance deadline to 2026, citing the administrative complexity of updating payroll and plan systems. 

"The final regulations do not extend or modify the administrative transition period provided under Notice 2023-62, which generally ends on Dec. 31, 2025," the IRS statement read.

The final regulations also address increased catch-up contribution limits. For participants ages 60 through 63, the limit rises to 150% of the standard catch-up amount. Eligible employees in SIMPLE plans will see their limit increase to 110% of the regular amount, and then to 150% for those in the 60-63 age group.

The IRS made several changes to the proposed rules in response to public comments. For example, plan administrators can now aggregate wages from certain separate common law employers when determining whether a participant is subject to the Roth catch-up requirement.

The agency also clarified that, if a participant subject to the Roth rule elects pre-tax catch-up contributions, the plan may treat that election as a Roth contribution unless the participant opts out.

In its preliminary analysis of the new catch-up rules, which run more than 90 pages, the National Association of Plan Advisors noted that the IRS has incorporated several suggestions from the American Retirement Association. Plans offering the catch-up for ages 60 through 63, for example, may limit total deferrals to 75% of compensation without running the risk of violating the universal availability requirement.

Read more: What advisors need to know about SECURE 2.0’s impact on retirement income planning

Correction methods for errors in catch-up contributions have also been expanded. Plans may now use either a Form W-2 correction or an in-plan Roth rollover to address contributions that should have been designated as Roth. The IRS included specific provisions for plans covering Puerto Rico participants and clarified that multiemployer and governmental plans may have later applicability dates due to unique administrative challenges.

The final regulations, which run nearly 100 pages, include numerous examples and scenarios to help plan sponsors and advisors navigate the new requirements. The rules take effect 60 days after their publication in the Federal Register on September 16, with most provisions applying to contributions for taxable years beginning after December 31, 2026.

Plans may also implement the Roth catch-up retirement rule for taxable years beginning before 2027, though the final regulations indicate they should use "a reasonable, good faith interpretation of statutory provisions."