A new chapter begins
IRS finalizes rules on Roth catch-up mandate for high earners
IRS final regulations provide much-needed guidance on the requirement that catch-up contributions by certain high-earning employees participating in 401(k), 403(b) and governmental 457(b) plans may be made only on a Roth basis (referred to in this article as the “Roth mandate”). Enacted as part of the SECURE 2.0 Act of 2022 (Div. T of Pub. L. No. 117-328), the Roth mandate is effective for tax years starting after 2023. However, compliance with the mandate is on hold until the end of this year pursuant to a two-year administrative transition period announced by IRS. Most plans will need to comply with the mandate starting in 2026. The final regulations don’t apply until 2027, so plans must use a reasonable, good faith interpretation of the statutory provisions until then.
The regulations also address SECURE 2.0’s higher “super catch-up” contribution limit for employees turning ages 60, 61, 62 or 63 during the year. That portion of the regulations will be covered in a future article.
Key differences in final regulations from proposed
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Wages used to determine if mandate appliesThe final regulations confirm that employers can rely on a catch-up eligible employee’s social security wages reported on box 3 of the Form W-2 to determine if the Roth mandate applies. The regulations also allow — but don’t require — employers to aggregate wages from one or more related employers in the same controlled or affiliated service group, or with employers using a common paymaster.
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Deemed Roth electionsThe final regulations include several new provisions on the use of deemed Roth catch-up elections. The regulations give employers flexibility in how to satisfy the requirement that employees have an opportunity to make an election that’s different than their deemed election. The regulations also address when deemed elections must cease to apply to an employee who is no longer subject to the mandate. Employers that wish to use deemed elections must amend their plans to provide for them (the amendment deadline for all SECURE 2.0 changes applies).
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Error correctionsSeveral new provisions address the correction of pretax deferrals that should have been Roth catch-up contributions under the mandate. The deadline for correcting these errors is longer under the final regulations than what IRS initially proposed (though employers may still prefer the proposed regulations’ approach). The final regulations also include two narrow exceptions to the requirement that Roth mandate errors must be corrected.