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On January 10, 2025, the Internal Revenue Service (“IRS”) issued proposed regulations providing long-awaited guidance on the updates to 401(k) catch-up contributions introduced by the SECURE 2.0 Act of 2022 (SECURE 2.0). These updates affect individuals nearing retirement age and high earners. If you’re a small business owner, you’ll want to prepare now to ensure a smooth transition and help your employees take full advantage of these changes.
Here’s what you need to know and how to prepare.
Understanding 401(k) Catch-Up Contributions
401(k) catch-up contributions allow employees aged 50 and older to contribute beyond standard IRS contribution limits, helping them boost their retirement savings as they approach retirement.
Key features of 401(k) catch-up contributions include:
| Feature | Description |
|
Eligibility |
Individuals must be at least 50 years old by the end of the calendar year. Individuals are deemed to be age 50 on the January 1 of the calendar year in which they turn 50. For non-calendar plans, an individual can make catch-up contributions even if they won’t turn age 50 until the next plan year, assuming they will turn 50 by the end of the calendar year in which they make catch-up contributions. Contributions apply after exceeding statutory or plan-imposed limits (e.g., 402(g) or 415(c)) or the ADP test limit for highly compensated employees (HCEs). |
|
Contribution Limits |
In 2025, the standard 402(g) limit is $23,500, while the catch-up limit is $7,500. Together, eligible individuals can contribute up to $31,000 annually ($23,500 402(g) + $7,500 catch-up). |
|
Testing |
Catch-up contributions are ignored when 415(c) and ADP testing. If a 415(c) or ADP test fails, elective deferrals can be recategorized as catch-up contributions to help pass testing. |
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Tax Treatment |
As elective deferrals, catch-up contributions can be made on a pre-tax or Roth basis - depending on the plan’s provisions. Pre-tax contributions reduce taxable income but are taxed upon withdrawal. Roth contributions are made after-tax and withdrawn tax-free in retirement. |
|
Plan Requirements |
Employers are not required to allow catch-up or Roth contributions. Employees should consult their Summary Plan Description (SPD) to verify availability. |
SECURE 2.0 Changes to Catch-Up Contributions
SECURE 2.0 introduces significant changes to 401(k) catch-up contributions, increasing the limits for certain age groups and mandating Roth contributions for high earners.
Increased Catch-Up Contributions for Ages 60-63
Section 109 of SECURE 2.0 increases the catch-up limit for individuals aged 60-63 to the greater of $10,000 or 150% of the regular catch-up limit ($11,250 for 2025). Key details include:
- Age Range: The enhanced limit applies from the year an individual turns 60 until the year they turn 64.
- Inflation Indexing: The $10,000 limit will be indexed for inflation after 2025.
Here’s a comparison of contribution limits for 2025:
|
Age |
Catch-Up Limit |
402(g) Limit |
Total Contributions |
|
50-59 |
$7,500 |
$23,500 |
$31,000 |
|
60-63 |
$11,250 |
$34,750 |
|
|
64+ |
$7,500 |
$31,000 |
Section 109 of SECURE 2.0 is effective for taxable years beginning after December 31, 2024.
High Earners Must Contribute Catchups as Roth
Section 603 of SECURE 2.0 requires high earners (those earning over $145,000 in FICA wages, indexed for inflation) to make catch-up contributions on a Roth basis. If a plan does not offer Roth contributions, high earners will not be able to make catch-up contributions.
Initially scheduled for 2024, this rule’s effective date was postponed by Notice 2023-62 until taxable years beginning after December 31, 2025.
Preparation Steps for Employers
To ensure compliance and support employees, employers should take the following steps:
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- Review and Update Retirement Plan Documents
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- Confirm that your 401(k) plan allows for Roth contributions to accommodate the mandatory requirement for high earners.
- Work with plan providers to update plan documents accordingly.
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- Coordinate with Payroll Providers
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- Ensure payroll systems can track employee compensation to identify those exceeding the $145,000 threshold and adjust contribution limits based on age and eligibility.
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- Work with your 401(k) Provider
- Discuss how the new limits will be handled in compliance testing.
- Verify if Roth recharacterization options are available to correct potential testing failures.
- Educate Employees
- Inform employees about changes, especially those aged 50+ and high earners.
- Work with your 401(k) Provider
Help Your Employees While Staying Compliant!
The SECURE 2.0 changes to 401(k) catch-up contributions present both opportunities and challenges for small businesses and their employees. By taking proactive steps now, you can ensure compliance while helping your employees maximize their retirement savings.
Need help navigating these changes? Contact us for guidance tailored to your business.
