The Department of the Treasury and the IRS have released the final regulations for Section 603 of the Secure 2.0 Act. This update provides key clarifications for plan sponsors and participants regarding changes to catch-up contributions. Catch-up contributions are additional contributions under a 401(k) or similar workplace retirement plan for employees who are ages 50 or older.
We’ve summarized the essential details to help you prepare.
What You Need to Know
The new rule requires that catch-up contributions made by certain higher-income participants be designated as after-tax Roth contributions.
Who is affected?
The rule applies to individuals aged 50 or over who had wages exceeding $145,000 in the prior calendar year. It’s important to note that “wages” are defined according to Social Security FICA wage standards.
What is changing?
If an individual meets the age and income criteria, any catch-up contributions they make to their retirement plan must be directed into a Roth account. This means the contributions will be made on an after-tax basis. Unlike pre-tax contributions, Roth contributions do not lower your current taxable income, but qualified withdrawals in retirement are tax-free.
This change requires plan sponsors to ensure their systems can correctly identify affected participants and process these mandatory Roth catch-up contributions. If the plan does not permit Roth contributions, then a catch-up eligible participant who is subject to the Roth catch-up requirement will not be permitted to make catch-up contributions.
Actionable Guidance: Key Dates and Implementation
Understanding the timeline is crucial for a smooth transition. There is an important distinction between when the rule takes effect and when the final regulations must be fully adopted.
- January 1, 2026: Roth Catch-Up Requirement Begins
This is the go-live date. By this point, all plan sponsors, payroll providers, and internal systems must be fully prepared to administer the mandatory Roth catch-up contributions for eligible participants.
- December 31, 2026: Plan Amendment Deadline
Plans must be amended by this date. The final regulations clarify that an amendment that applies mid-year is not a prohibited change to a safer harbor 401(k) plan.
- January 1, 2027: Final Regulations Effective Date
This is the date by which plans must fully comply with the specifics outlined in the final regulations document.
What to Do Before the Deadlines
To bridge the gap between these two dates, regulators have provided a transition period. For taxable years before December 31, 2026, a “reasonable, good faith interpretation” standard is in effect. This allows you to rely on guidance from both the previously proposed regulations and the newly finalized ones as you work toward full compliance. This period is designed to give you, payroll providers, and administrators sufficient time to update systems and processes without penalty, provided you are making an effort to comply.
Please reach out to the Saville team if you have any questions about the impact of these changes.