In this series of articles, we explore the implications of SECURE 2.0’s changes to catch-up contributions and how employers should respond.
Nearly all employers offer eligible participants the opportunity to make additional catch-up contributions to their retirement plans. Doing so provides a great way for older workers to literally “catch up” by saving more money as they get closer to retirement age, money they may not have been able to save earlier in their careers.
Under current law, those contributions—up to an extra $7,500 for 2023—are equally available to employees who are age 50 or older. However, beginning in 2025, the SECURE 2.0 Act makes so-called “super-catch-up contributions” available to employees who reach ages 60, 61, 62 or 63 during the year. For those employees, employers may increase the catch-up contribution limit to the greater of:
$10,000 (which will be indexed for cost-of-living increases starting in 2026); or
150% of the regular age 50 catch-up contribution limit (which is already separately indexed for cost-of-living increases).
For all other catch-up contribution-eligible employees—including those who will not reach at least age 60 during a given year, or who will attain age 64 or older in such a year—the ordinary catch-up contribution limit will remain in place.
Discussions about the obstacles to implementing this change have taken a bit of a backseat to the much-talked-about challenges of the act’s new Roth catch-up contribution requirement. But those obstacles have also left many employers feeling like the new super-catch-up-contribution limit is anything but super. Many employers have emphasized that, currently, payroll providers and recordkeepers need only track one age and one limit for catch-up contributions. But employers that add super-catch-up contributions will need to track three separate age categories—age 50 through age 59 (regular catch-up), age 60 through 63 (super-catch-up), and age 64 and older (back to regular catch-up)—and two separate limits. As a result, adding this new feature will require employers and their service providers to develop new processes to monitor these various ages and limits and to audit that information to ensure it is properly applied.
That alone would be a tall order for most employers, but when combined with the many other changes under SECURE 2.0, it seems even more daunting. The bit of good news for employers is that, unlike the new Roth catch-up contribution requirement (which is effective beginning in 2024), this change won’t apply until 2025. In addition, as it stands now, we expect the change to be optional. Such treatment is consistent with other special catch-up contribution features (e.g., the special 403(b) catch-up), which remain optional for employers. It is also consistent with the lack of a Roth-catch-up-like universal availability requirement for the super-catch-up-contribution feature. However, further guidance would help confirm that employers are free to choose if, and when, to add this to their plans. In either case, because nearly all employers currently offer regular catch-up contributions to employees, most expect this feature to become commonplace, meaning employees are likely to expect it to be made available to them.
For any questions regarding SECURE 2.0 changes, please contact your regular McDermott lawyer or one of the authors.