In this series of articles, we explore the implications of SECURE 2.0’s changes to catch-up contributions and how employers should respond.
The SECURE 2.0 Act requires employees whose “wages” from their employer exceed $145,000 in the prior calendar year to make their catch-up contributions on a Roth basis.
When most of us talk about wages, we mean the pay we receive in our weekly, biweekly, or monthly paychecks or perhaps the annual salary we receive from our employers. But the meaning of wages under employer-sponsored retirement plans is not quite so simple. Retirement plans often apply (and in some cases are required to use) multiple definitions of wages or compensation for various plan purposes. This may include separate definitions for:
Determining the total contributions an employee can make or receive;
Applying the nondiscrimination testing rules under the US tax code; or
Evaluating whether an employee is considered a highly compensated or key employee.
Given this complexity, failures to follow a plan’s definition of compensation are one of the most common issues experienced by retirement plan sponsors. Unfortunately, as drafted, SECURE 2.0 only adds to that complexity. It provides that wages for purposes of applying the $145,000 Roth catch-up contribution threshold mean wages as defined in Code Section 3121(a), i.e., wages used for FICA (Social Security, Medicare and Additional Medicare) tax purposes.
For many employers, this definition will differ from the one(s) currently being used under their plans. Because the rule applies beginning in 2024 and looks back to compensation paid in the prior year, this effectively means that starting now, employers will need to establish processes for identifying high-wage earners (those making more than $145,000) using this new and potentially different definition of compensation. Like many of the other catch-up contribution-related changes, this will require considerable coordination, especially with employers’ payroll providers and recordkeepers.
In added complexity for self-employed individuals subject to SECA taxes (rather than FICA taxes), the new rule also raises questions about whether Congress intended to exclude such individuals from its application.
For any questions regarding SECURE 2.0 changes, please contact your regular McDermott lawyer or one of the authors.