IRS delays implementation of SECURE 2.0 Roth catch-up provision

Vanguard, along with other industry stakeholders, recently signed a letter to Congress requesting a two-year delay in its implementation. The IRS recognized the complexities associated with implementation of this provision and announced a two-year administrative transition period during which catch-up contributions may continue to be made on a pre-tax basis for participants who earned over $145,000 in FICA wages in the preceding calendar year.

• The requirement that catch-up contributions for those individuals be made on a Roth basis will now apply to tax years beginning on or after January 1, 2026.
• Plans that do not currently offer Roth contributions may continue to allow catch-up contributions on a pre-tax basis for all participants during this two-year transition period.
• When SECURE 2.0 was passed, Congress inadvertently removed the provision that allows all catch-up contributions. This was unintended, and the Notice clarifies that all plan participants over age 50 can continue to make catch-up contributions after 2023, regardless of income.

While this is great news and gives plan sponsors, recordkeepers, and payroll providers additional time to comply with the new Roth catch-up rules, several  questions remain. The Notice indicates that the IRS intends to issue additional guidance related to the Roth catch-up provision and is expected to address some of these outstanding questions, including clarification that:

• Mandatory Roth catch-up contributions would not apply in the case of an eligible participant who does not have wages as defined in section 3121(a) (i.e., FICA wages for purposes of catch-up contributions) for the preceding calendar year from the employer sponsoring the plan. This could include, for example, state and local government employees or partners in a law firm.
• Pre-tax contribution elections by individuals who earn in excess of $145,000 in FICA wages would be permitted to be “flipped” automatically to Roth catch-up contributions without requiring any additional consent by the participant (i.e., a participant’s pre-tax election would “spillover” to Roth catch-up when the IRC §402(g) limit is reached).
• Defined contribution plans maintained by more than one employer (including multiemployer plans) would not be required to aggregate compensation from participating employers in the plan for purposes of determining the excess $145,000 FICA compensation threshold.

As a result of the Notice, Vanguard will not yet be implementing processes to accommodate Roth catch-up contributions for January 1, 2024. As we continue to review the guidance we receive, we will share additional commentary and timely updates along the way.

If a plan does not currently offer a Roth contribution option, we will partner with plan sponsors to add that feature to satisfy the new January 1, 2026, effective date. The addition of a Roth contribution option to a plan now can provide tax diversification for participants, with the added benefit that plans will be ready for Roth catch-up contributions beginning in 2026.

Look for more information from Vanguard in the coming weeks and months, including a live webinar. Meanwhile, watch a video update from Managing Director John James. Existing SECURE 2.0 resources can be found on Vanguard’s institutional website.

From sharing our voice in Washington, D.C., to working with other providers, Vanguard is here to guide plan sponsors through any SECURE 2.0 changes—and their effects on their plans—over the coming weeks, months, and years.