Congress has to manage conflicting needs when trying to legislate and often this struggle ends with new challenges for taxpayers – both employers and employees. When crafting SECURE 2.0 they were trying to balance the need for current tax revenue with the need to increase the retirement readiness of people in this country. In April we discussed the so-called Super Catch-up for employees ages 60-63, which focused on the readiness side. In the same bill Congress added a new requirement which will require High Wage Earners, a brand new categorization of employees, to designate their catch-up contributions as Roth contributions, thereby making them taxable during the year in which the contributions are made. There are several elements of this requirement that will leave both employers and employees confused until final regulations are issued. While originally set to be effective in 2024, the effective date was pushed to 2026 because of the complexity of the challenges. Here are some of the important elements of this legislation:

• The Roth mandate applies to 401(k), 403(b) and 457 plans, but not IRAs, including SIMPLE IRA plans.
• It only applies to employees with ”wages” in excess of $145,000 during the prior year.
  • It is wages subject to FICA, box 3, not gross compensation as is normally discussed when determining Key or Highly Compensated Employee status
  • Self-Employed individuals do not have wages, they have self-employment income, therefore they would not be subject to the Roth requirement
  • The look-back rule means new employees would not have to designate their first year of catch-up with an employer as Roth, because they did not reach the threshold during the prior year.
• If a plan currently does not allow for Roth designation of deferrals the Sponsor cannot be forced to put in a Roth option. However, if the plan is not amended to allow for Roth, High Wage Earners will not be allowed to make catch-up contributions.
• Employers must comply with this law effective January 1, 2026, and if they wish to amend their plan to allow for Roth designation of deferrals those amendments must be executed by December 31, 2026 for private sector plans, excluding collective bargained plans.

Much of this information could be subject to change depending of the timing and content of Final Regulations issued by the Internal Revenue Service. Visit our blog to check for updates on the implementation of this law and watch for the notice we will be sending via email in November. As always, contact your client relationship manager or ABG sales representative if you would like to discuss the topic further.