SECURE Act 2.0: Higher Catch-Up Contributions

The SECURE 2.0 Act of 2022 introduced several updates to retirement savings plans, including a new provision (Section 109) that allows employees ages 60 to 63 to make higher catch-up contributions starting in 2025. This change is designed to help individuals boost retirement savings during the critical final years leading up to retirement. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Current Catch-Up Contribution Limits

As of 2024, employees aged 50 and older can make catch-up contributions to their retirement accounts and their standard elective deferrals. The current limit for these catch-up contributions is $7,500. This means that employees who have reached the standard contribution limit can contribute an additional $7,500 to their retirement savings, giving them a total contribution limit of $30,500 for the year.

These catch-up contributions are a key feature for those nearing retirement, allowing them to save more as they approach the end of their careers.

Changes Effective January 1, 2025

Starting on January 1, 2025, the SECURE 2.0 Act will allow employees who turn 60, 61, 62, or 63 during the calendar year to make even larger catch-up contributions. Under this new rule, the catch-up contribution limit for employees in this age range with non-SIMPLE plans will be greater than $10,000 or 150% of the regular age 50+ catch-up contribution limit, currently set at $7,500 for 2024.

For example, if the standard catch-up contribution limit in 2025 remains at $7,500, employees ages 60 to 63 could contribute an additional $11,250, bringing the total possible retirement contribution to $34,250. This enhanced limit provides a significant opportunity for certain employees to increase retirement savings. The increased limit is greater than $5,000 or 150% of the regular catch-up limit for SIMPLE plans.

What Happens at Age 64?

Once employees reach age 64, they will no longer be eligible for the higher catch-up contributions. Instead, they will revert to the standard age 50+ catch-up contribution limit. In the calendar year they turn 64 and beyond, the additional catch-up contributions will be capped at the regular limit.

Considerations for Governmental 457(b) Plans

The enhanced catch-up contribution rules also apply to governmental 457(b) plans, but with some specific considerations:

• Employees age 60 to 63 can use the increased catch-up contribution limit if they have already maxed out their standard contribution limit under IRC Section 457.
• Participants must choose between using the new age 60-63 catch-up limit or the special 457 catch-up provision in any given year. They cannot use both simultaneously.
• After employees reach age 64, they will revert to the standard age 50+ catch-up limit unless they qualify for the special 457 catch-up provision.

Roth Contribution Requirement for High Earners

The SECURE 2.0 Act also introduces a new requirement for high earners starting in 2025. Any catch-up contributions must be made as Roth contributions if an employee’s wages exceed $145,000 (adjusted annually for inflation). This means these contributions will be taxed upfront but grow tax-free.

However, the IRS has provided a transition period for implementing this requirement, so it will not be enforced in 2025. Plan sponsors should still prepare for this change and communicate it to employees who may be affected.

Next Steps for Plan Sponsors

Under SECURE 2.0, the enhanced catch-up contribution rules are optional for plan sponsors. If a sponsor decides to offer this feature, several steps must be taken, including:

• Plan Document Amendments: The plan document must be amended to incorporate the optional increased catch-up feature. This includes deciding whether employer matching contributions will apply to increased catch-up contributions.
• Update Salary Reduction Agreements: The applicable salary reduction agreements must be updated to reflect the new contribution limits and eligibility rules.
• Payroll System Adjustments: Payroll systems must be configured to recognize eligible participants and apply the correct catch-up limits. This may involve updating payroll software and processes to accommodate the new rules.
• Employee Communication: Plan sponsors must communicate these changes to eligible participants, explaining how they can take advantage of the higher limits and the benefits of maximizing retirement savings.
• Coordination Across Multiple Plans: Similar to the age 50+ catch-up contributions, the higher catch-up contributions for employees ages 60-63 will be coordinated across all applicable plans, including 403(b), 401(k), SARSEP, and SIMPLE retirement plans. It’s important for plan sponsors to ensure that contributions are managed correctly across any plans an employee participates in, to avoid exceeding the allowable limits.
• Monitor Legislative Updates: Stay informed about any further legislative changes or IRS guidance that could impact the implementation of these provisions, particularly regarding the potential technical correction bill related to the 150% limit.

Contact Us

By taking these steps, plan sponsors can help their employees fully take advantage of the opportunities provided by the SECURE 2.0 Act, ensuring a stronger financial future as they approach retirement. If you have questions about the information outlined above or need assistance with your next benefit plan audit, Wilson Lewis can help. For additional information, call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.