
Over the past few years, several of the provisions of the SECURE Act 2.0 have become effective. In fact, the legislation calls for over 90 changes to various aspects of retirement plan operations, benefits, and more. The high volume has meant a phase-in period of over six years. In many cases, the provisions have required additional guidance and clarification from the IRS on specific details. Earlier this month, the agency released proposed regulations on catch up contributions and automatic enrollment. The proposed regulations provide guidance for the proper implementation of each provision and will apply to plan years that begin 6 months after the issuance of final version. To help clients, prospects, and others, WhippleWood CPAs has provided a summary of the key details below.
Regulations for Catch-Up Retirement Contributions
The first set of regulations concerned catch-up retirement contributions, particularly for high-income participants and employees between the ages of 60 and 63. The proposed regulations are a response to the Secure 2.0 Act of 2022 statutes and mainly pertain to retirement plan participants who are age 50 or older and their ability to make catch-up contributions as elective deferrals. They also include the rule that for some participants eligible for catch-up contributions, these will need to be made as Roth contributions. While not final, the proposed rules are set to go into effect in 2026.
The IRS has provided this update as a response to comments received after Notice 2023-62, which announced a transition period for catch-up contributions. Employees who are at least 50 years old and participate in either a 401(k), 403(b), or governmental 457(b) plan, and have Social Security wages of over $145,000 in the previous year, from the employer that hosts the plan, will need to make after-tax Roth contributions.
Plans that offer Roth catch-up elections cannot exclude these contributions from the gross income of the participant. Any contributions made by an eligible employee must go in a designated Roth account. Employees also can choose not to make catch-up Roth contributions.
The announcement also included guidance on catch-up contributions for participants from ages 60 to 63. Starting in January 2025, these participants can contribute either $11,250 or 150% of the current catch-up limit for age 50, whichever is greater. The standard amount applies starts in the year the participant turns 64. It is likely that cost-of-living adjustments will also be made to these catch-up contributions starting in years after December 31, 2025. Employees that are part of SIMPLE plans will also be subject to these rules.
403(b) plan administrators must ensure those eligible are also being treated equally as part of the universal availability requirement. This means participants should be able to make the same level of catch-up contributions in dollars to their plans if they are deemed eligible by SECURE 2.0. An additional provision will make it so that all participants aren’t subject to the same catch-up limit, so that increasing the limit for employees from 60 to 63 won’t mean a plan is ineligible for universal availability.
Auto-Enrollment Proposed Regulations
The IRS also announced proposed regulations for auto-enrollment on the same day. New 401(k) and 403(b) plans, under SECURE 2.0, need to have an “eligible automatic contribution arrangement” beginning in the 2025 plan year. This would involve an automatic enrollment that starts at a 3% minimum contribution rate and increases annually by 1% until it hits at least 10%. This is applicable to plans that are established after December 29, 2022, but some exempt entities include “new and small businesses, church plans, and governmental plans.” An employee does have the ability to opt out of auto-enrollment.
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The details in the proposed regulations provide important insight for plan sponsors on how each of these provisions will need to be administered. While awaiting the public hearing, it is important to become familiar with these details to identify potential plan changes. If you have questions about the information outlined above or need assistance with your next retirement or 401(k) plan audit, WhippleWood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.