IRS elects to contribute complex final regulations on super and Roth catch-ups

Super Catch-Up Contributions

For taxable years after December 31, 2024, catch-up eligible participants who attain age 60-63 during the year are able to contribute the greater of (i) $10,000, or (ii) 150% of the regular catch-up limit ($11,250, or 150% of $7,500, for 2025) to 401(k), 403(b), and governmental 457(b) plans. The proposed regulations provided that super catch-up contributions would not violate the “universal availability” requirement that applies to catch-up contributions (the requirement that all catch-up eligible participants have the opportunity to contribute the same dollar amount as catch-up contributions). The final regulations confirm this point, and include the following clarifications:

• If one plan within a controlled group implements super catch-up contributions, all plans within the same controlled group as the plan sponsor must implement the super catch-up contributions in order to satisfy the universal availability rule; and
• A plan can satisfy the universal availability rule even if employees who may be excluded from coverage testing (such as collectively bargained employees) are prohibited from making super catch-up contributions. 

Mandatory Roth Catch-Up Contributions

Beginning in 2024, participants with wages above $145,000 (subject to indexing) in the immediately preceding calendar year are required to make any catch-up contributions as Roth contributions. The IRS effectively delayed enforcement of this provision by allowing an administrative transition period for 2024 and 2025 in response to plan sponsor concerns over the work needed to implement these complex rules and outstanding questions on how to comply. The preamble to the final regulations confirms that the IRS will not extend this transition period.

The final regulations provide clarifications and offer plan sponsors some new administrative flexibility in implementing the Roth catch-up requirement. Key changes include: 

• Impacted Participants. The new requirement only applies to an individual who received wages for purposes of the Federal Insurance Contributions Act (FICA wages, as reported in Box 3 of the Form W-2) from the “employer sponsoring the plan” in excess of the wage threshold in the preceding calendar year. As provided under the proposed regulations, the “employer sponsoring the plan” generally means the individual’s common law employer, without regard to wages paid by any other employers, even those within the same controlled group. However, the final regulations permit a plan sponsor to aggregate wages paid by multiple employers in certain circumstances, including: 

• Employers using a common paymaster under Internal Revenue Code Section 3121(s), 
• Members of a controlled group described in Internal Revenue Code Section 414, and
• Predecessor and successor employers in an asset sale.

• Plans Without Roth Contributions. If a plan does not allow any Roth contributions, the plan must prohibit participants subject to the Roth catch-up requirement from making catch-up contributions altogether. This prohibition on catch-up contributions will not run afoul of the universal availability requirement, even if participants who are not subject to the Roth catch-up requirement are allowed to make catch-up contributions. The proposed and final regulations indicate that these plans generally must perform nondiscrimination testing on the availability of catch-up contributions, because some individuals who are impacted by the Roth catch-up requirement and prohibited from making catch-up contributions might be non-highly compensated employees. The final regulations provide that a plan will be deemed to satisfy nondiscrimination testing if the plan also prohibits highly compensated employees with net earnings from self-employment in excess of the Roth catch-up wage threshold from making catch-up contributions. In general, this will be partners in a partnership who are treated as employees for retirement plan purposes, but who do not have FICA wages that would otherwise cause them to be subject to the Roth catch-up requirement.
• Deemed Roth Contributions. The plan may provide that any participant subject to the Roth catch-up requirement is deemed to have designated any catch-up contributions as Roth, as long as those participants are given an effective opportunity to make a different election (such as an opportunity not to make catch-up contributions). A plan can provide for such a deemed Roth election regardless of whether it requires a separate catch-up contribution election or uses a spillover design. The final regulations do not expand on whether specific notices or other conditions are required to provide an effective opportunity to make a different election, and explain that this is a facts and circumstances test. The final regulations also contain a new requirement that a deemed Roth catch-up election must cease to apply within a reasonable period of time after the participant is no longer subject to the Roth catch-up requirement. 
• Treatment of Earlier Roth Contributions as Catch-Up Contributions. A plan can take into account Roth contributions that are made prior to reaching the relevant deferral limit for purposes of determining whether the Roth catch-up contribution requirement is satisfied. For example, if a participant makes regular Roth deferrals early in the year, those contributions are permitted to be treated as catch-up contributions if needed to satisfy the Roth catch-up requirement. The final regulations clarify that a plan can still apply a deemed Roth catch-up election once the participant reaches the relevant deferral limit, even if the participant has made Roth contributions earlier in the year. However, the final regulations do emphasize that the plan must still provide the participant with an effective opportunity to make a new election that is different than the deemed election.

• Correcting Failures. The proposed regulations provided several methods for correcting the error that results when a pre-tax catch-up contribution is made by a participant subject to the Roth catch-up requirement, and the final regulations retain these methods. Correction methods include (1) transferring the elective deferrals to the participant’s Roth account and reporting the contribution as a designated Roth contribution on the participant’s Form W-2 for the year of the deferral, or (2) conducting an in-plan Roth rollover and reporting the amount of the in-plan Roth rollover on the participant’s 1099-R for the year of such rollover. The final regulations clarify several points on corrections: 

• The same correction does not have to apply to all plan participants. However, the plan must treat all similarly-situated participants the same.
• Correction is not required if (i) the amount of the mistaken pre-tax deferral was under $250, or (ii) the participant only became subject to the Roth catch-up requirement as a result of an amended Form W-2 issued after the deadline for correction.

• Effective Date of Regulations. The final regulations are effective for taxable years beginning after December 31, 2026. Plans must begin implementing the Roth catch-up requirement in 2026, but plan sponsors can apply a good faith interpretation of the statutory provisions until the regulations become effective. 

The final regulations highlight that plan sponsors will need to devote significant time and resources to updating their systems in order to comply with the Roth catch-up requirement. Plan sponsors should be working this fall with payroll providers and recordkeepers on a process for identifying impacted participants, communicating the new requirements and any new election processes to these participants, and implementing deemed Roth catch-up elections.

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