The SECURE Act 2.0 (the “Act”) has brought many changes to long-established provisions in retirement plans. A couple of those changes affect catch-up contributions. Catch-up contributions are those extra deferrals that participants who are age 50 or older are permitted to make, over and above the general annual limit on deferrals. The annual limit on catch-up contributions is periodically adjusted and for 2023 the limit is $7,500. The purpose is to allow participants who are getting closer to retirement age to “catch up” on deferral opportunities they may have missed earlier in their working lives. The recently-passed Act has one provision which increases these deferral opportunities for older participants and one that is designed to help offset other costs of the legislation.
More Catch-Up Please
Starting in 2025, participants who are age 60 to 63 will be able to make up to $10,000 in catch-up contributions, or, if greater, an amount that is 50% more than the regular catch-up limit. After 2025, this higher limit will be adjusted annually for inflation. Note that to be eligible for these additional catch-up contributions, the participant must be at least age 60, but not have reached age 64 by the close of the taxable year.
Example: In 2025, let’s assume that the general deferral limit is $26,000 and the regular catch-up contribution limit is $8,500. The maximum deferrals allowed for the following 3 participants would be:
Participant A (age 35): $26,000
Participant B (age 52): $34,500 ($26,000 + $8,500)
Participant C (age 63): $38,750 ($26,000 + $12,750 [$8,500 + 50% ($4,250), which is $12,750 and greater than $10,000])
Not So Fast
Currently, as long as the plan provides, participants may elect to make catch-up contributions on a pre-tax or Roth (after-tax) basis. Beginning in 2024, all catch-up contributions must be made as Roth contributions, unless the participant’s compensation is $145,000 or less. This compensation criteria will be indexed annually for inflation. The purpose of this provision is to offset the costs of other provisions in the Act.
There is some time for plan sponsors to make decisions and adjust administrative procedures, but 2024 (for Roth treatment) and 2025 (for increased catch-ups for older participants) will come sooner than we all realize. The time is now to start looking at how these changes will affect plans, participants, and administration.