Dear Client:

We want to make you aware of a mandatory new tax provision enacted by the SECURE 2.0 Act that may require changes to your company’s retirement plan.

Beginning with the 2024 taxable year, catch-up contributions made by employees who are age 50 and over must be made to employer-provided qualified retirement plans on a Roth basis (after-tax) for employees with compensation in excess of $145,000.

This provision of the SECURE 2.0 Act affects employer-sponsored 401(k), 403(b) and governmental 457(b) plans. This new rule does not apply to SEP or SIMPLE plans.

Employers that don’t currently offer a Roth option in their 401(k), 403(b) or 457(b) plans and that want to ensure their qualified highly compensated employees age 50 and over can still make catch-up contributions in 2024 must take action now to amend their plan documents to allow for Roth contributions.

If you fail to offer a Roth option in your retirement plan, then these employees will be unable to make any catch-up contributions. For the 2023 taxable year, the inflation-adjusted catch-up contribution amount for taxpayers age 50 and older is $7,500. The 2024 contribution amount has not yet been announced.

“Highly compensated employee” for purposes of the mandatory Roth catch-up contribution is defined as an employee whose wages for the preceding calendar year from the employer sponsoring the plan exceed $145,000.

This definition means that:

• The $145,000 wage limit is based strictly on the amount of wages paid in the prior calendar year (even for owners of the business); and
• High earners who are new employees will get a free pass in their first year because only wages paid by the employer sponsoring the plan in the prior year are counted toward the $145,000 wage limitation.

Please call if you would like to discuss this topic further.

Sincerely,

Your tax professional