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1. Roth catch-up contributions
Catch-up contributions allow participants to save more for retirement once they reach a certain age. Before SECURE 2.0, participants could make pre-tax catch-up contributions starting the year they turned age 50. The catch-up limit for 2023 is $7,500.
Effective January 1, 2025, SECURE 2.0 increases the catch-up limit for participants ages 60 to 63 to the greater of $10,000 or 150% of the then-current catch-up limit.
SECURE 2.0 also changes how some participants must make catch-up contributions. Initially effective January 1, 2024, but because of a two-year administrative delay issued by the Internal Revenue Service (IRS), now effective January 1, 2026, participants ages 50 or older who earned more than $145,000 in FICA wages in the previous year can make catch-up contributions only as Roth contributions. Participants who earned $145,000 or less may continue to make pre-tax catch-up contributions. (Only compensation from the employer sponsoring the plan counts toward the $145,000 limit.1)
What the Roth catch-up provision means for plan sponsors
Plans that offer catch-up contributions but don’t allow Roth contributions will need to decide whether to add a Roth option. If they don’t add a Roth option, they’ll need to eliminate catch-up contributions.
As they are today, payroll providers will be primarily responsible for monitoring contribution limits. Plan sponsors should work with their payroll providers to ensure they can provide accurate data and tracking services. During the fourth quarter of 2025, plan sponsors will need to give Vanguard an annual list of employees who met the prior-year FICA wage limit before the first pay period of the new year.
- Sponsors of plans not currently offering a Roth option can work with us and their payroll provider to add it. In 2022, 80% of Vanguard plans offered Roth contributions, and nearly all offered catch-up contributions.2 We’ll give sponsors of plans that offer catch-up contributions but not Roth contributions a provision-specific plan design change form to make the changes required for compliance.
- Vanguard is determining next steps based on the administrative delay provided by the IRS on August 25, 2023. We’ll share additional information when it’s available.
2. Long-term, part-time employees
Some employees lack access to a retirement plan. The original SECURE Act (enacted in 2019) addressed the problem by requiring part-time employees who complete three consecutive years of service where they worked at least 500 hours to be eligible to make elective deferrals to 401(k) plans, effective January 1, 2024.
The long-term, part-time (LTPT) employee provision of SECURE 2.0 broadens access to retirement plans for part-time employees. SECURE 2.0 grants retirement plan eligibility for elective deferrals to part-time employees who complete two consecutive years of service where they work at least 500 hours beginning January 1, 2025, and extends LTPT employee coverage to 403(b) plans.
What the LTPT provision means for plan sponsors
SECURE 2.0 clarifies that, for vesting purposes, plan sponsors can disregard hours of service accrued by LTPT employees before January 1, 2021. Employers may also exclude LTPT employees from nondiscrimination testing, including actual deferral percentage, actual contribution percentage, 410(b), and top-heavy testing.
Plan sponsors aren’t required to offer employer contributions to LTPT participants, but we encourage them to do so. Offering an employer match has numerous benefits, including increased employee engagement and tax advantages for employers. Excluding employer contributions to LTPT employees may also result in administrative costs to the plan in the form of payroll file updates.
- We’ve prepared an implementation strategy for the LTPT provision that can be customized to fit your plan’s needs.
- Although practices are in place to track employee eligibility, many plans have additional factors to consider, such as collective bargaining agreements and specific exclusions of part-time employees. Your client success executive can work with you to ensure your plan is set up for success when the LTPT provision takes effect.
- We’ll send plan-specific details on our LTPT provision implementation strategy to plan sponsors customized to each plan’s eligibility, matching, and vesting rules.
3. Required minimum distributions
The Internal Revenue Code generally requires plan participants to begin taking distributions from a qualified plan upon the later of their reaching a certain age or retirement.
SECURE 2.0 increased the required minimum distribution (RMD) age from 72 to 73, effective January 1, 2023. (The age will increase to 75 in 2033.) Participants with Roth accounts in employer-sponsored retirement accounts will also benefit, as Roth accounts are no longer subject to pre-death RMDs, effective January 1, 2024.
What the RMD provision means for plan sponsors
Despite a plan administrator’s best efforts, a participant can miss taking RMDs, which could result in a significant excise tax on the participant. SECURE 2.0 reduces this tax from 50% to 25%, with a possible further reduction to 10% if certain requirements are met.
Effective January 1, 2024, Roth money won't be subject to an RMD, nor will it be included when calculating RMD amounts. This change creates parity between Roth IRAs and qualified plans. Roth IRAs were never subject to RMDs, possibly causing confusion for participants with both types of accounts.
- We’ve already raised the RMD age in our systems to 73.
- We’ve also notified participants who were expecting an RMD this year because they turned 72 that they have another year before needing to take that distribution.
- We’re updating our systems, procedures, and communications to reflect the exclusion of Roth monies from RMDs.
Even more help?
1 Beginning in 2025, the FICA wage limit will be indexed in increments of $5,000.
2 How America Saves 2023. Vanguard, 2023.