From regulation to reality:
SECURE 2.0 Roth catch-up regulation unpacked

16 minutes 47 seconds

00:00:41:07 - Hi, everyone.

00:00:42:05 - Thank you for joining us today.

00:00:44:00 - My name is Julia Novia,

00:00:44:21 - Head of Full-Service Operations and Regulatory Implementation.

00:00:48:17 - And I have Janet Luxton, Senior ERISA Consultant, with me today

00:00:53:00 - to talk about the final catch-up contribution regulation.

00:00:56:18 - As most of you know, the Treasury Department and IRS did issue

00:01:00:10 - the final regulation for key catch-up provisions of the SECURE act.

00:01:05:08 - Specifically, the required Roth catch-up provision

00:01:08:22 - and optional higher catch-up provision.

00:01:11:23 - We wanted to take the time today

00:01:13:14 - to dive into what all this means, and to help answer questions

00:01:17:10 - that you might have about what has changed and what has remained the same,

00:01:22:03 - as well as some key takeaways to help you navigate the next few months

00:01:26:16 - as the effective date for the Roth catch-up provision draws near.

00:01:31:00 - We know Roth is

00:01:32:03 - complex and affects every plan differently.

00:01:35:04 - Vanguard is here to help break down the details and requirements

00:01:39:15 - to keep plan sponsors informed and prepared.

00:01:43:16 - So with that, I'm going to hand it over to Janet to go over the details.

00:01:47:10 - So while we're waiting for the slides to load, I'll just go ahead and get started.

00:01:51:05 - As Julia mentioned, we did receive the final regulation

00:01:54:08 - impacting the Roth catch-up rule, and we want to take time today

00:01:57:15 - just to give an overview of the final regulation and explain

00:02:00:19 - how it might differ from the proposed regulation we got in January of 2025.

00:02:05:22 - As you know, some of this is very nuanced.

00:02:08:11 - So a lot of the impact is going to depend on the individual client solutions.

00:02:12:08 - And how their current plan might be set up today,

00:02:15:02 - as well as the capacity of their payroll provider.

00:02:17:21 - Before I get too heavy into the final regulation,

00:02:20:13 - I'd like to give a quick overview of the Roth catch-up provision.

00:02:24:10 - Effective January 1st, 2026, employees age 50 and older

00:02:28:15 - who earned more than $145,000 in FICA wages in the previous

00:02:32:22 - calendar year from the employer sponsoring the plan, known as Roth

00:02:36:15 - catch-up required participants

00:02:38:11 - will be required to make catch-Up contributions as Roth contributions.

00:02:42:17 - Originally, plans that offered catch-up contributions without a Roth contribution

00:02:46:15 - option would have needed to stop all catch-up contributions.

00:02:50:17 - On January 13th, 2025, the IRS issued a proposed regulation

00:02:54:22 - addressing the SECURE 2.0 provisions that pertained to catch-up contributions.

00:02:59:18 - This regulation provided several points of clarification for the Roth catch-up

00:03:03:15 - provision, including that a plan can continue to offer catch-up contributions

00:03:08:06 - even if it does not allow for Roth contributions.

00:03:11:06 - That's interesting.

00:03:12:08 - So with the final regulation, what has changed?

00:03:15:05 - Can you explain more about what the final regulation is?

00:03:18:23 - Yes. Let's talk more about the final regulation.

00:03:21:20 - On September 16th, 2025, the Department of Treasury

00:03:25:05 - and the Internal Revenue Service published the long-awaited final regulation

00:03:29:11 - impacting key catch-up provisions of the SECURE 2.0 Act.

00:03:34:04 - These rules mark a significant shift in retirement plan administration,

00:03:38:02 - particularly for high income earners aged 50 and older.

00:03:41:15 - Among the notable changes is the requirement that catch-up

00:03:44:06 - contributions must be made as Roth for certain individuals, starting in 2026.

00:03:49:19 - The final regulations provide detailed guidance for plan sponsors navigating

00:03:53:19 - compliance, correction and participant elections associated with Roth

00:03:57:17 - catch-up and clarifies

00:03:59:08 - increased catch-up contribution limits for individuals ages 60 to 63.

00:04:04:10 - The final rule reflects public feedback

00:04:06:14 - and aims to balance statutory mandates with administrative flexibility,

00:04:10:21 - offering a clearer path forward for plan sponsors and participants alike.

00:04:15:02 - The biggest thing I want to call out is that there was no change

00:04:17:20 - to the effective date of January 1st, 2026, for Roth catch-up.

00:04:22:10 - As you may recall, this provision was originally set

00:04:24:20 - to take effect on January 1st, 2024.

00:04:27:23 - As a result of industry

00:04:29:05 - feedback, the IRS implemented a two-year administrative delay,

00:04:32:23 - pushing the effective date back to January 1st, 2026.

00:04:36:20 - The final regulation confirms that the effective date for Roth catch-up

00:04:40:03 - remains January 1st, 2026, with two small exceptions

00:04:44:00 - for collectively bargained plans and multiemployer plans.

00:04:47:19 - It's important to understand that while the effective date

00:04:50:12 - for the Roth catch-up remains January 1st, 2026,

00:04:53:23 - we did receive some relief with respect to applying the final regulation.

00:04:57:19 - So besides the effective date remaining the same, is there anything else of note

00:05:01:21 - that plan sponsors need to pay attention to in regard to this guidance?

00:05:05:17 - Yes. So throughout 2026, plan sponsors can comply

00:05:09:09 - with the final regulation based on a good faith interpretation.

00:05:13:02 - So they're kind of doing their best to comply with it.

00:05:15:15 - This transition period is very common from a regulatory standpoint

00:05:18:22 - when guidance comes out late. The regulation will be in full effect

00:05:22:07 - in 2027.

00:05:24:07 - We also received clarification around offering catch-up contributions in general.

00:05:29:08 - So you may remember earlier on it was thought that if a plan offered

00:05:32:12 - catch-up contributions without a Roth contribution option,

00:05:35:09 - they would have to add Roth contributions on or in order to continue

00:05:38:12 - offering catch-up contributions after January 1st, 2026.

00:05:42:13 - The final regulation confirmed that it's not required,

00:05:45:12 - so if you have a plan today that offers catch-up contributions

00:05:48:12 - without a Roth contribution option, they do not have to add it going forward.

00:05:52:19 - They can continue to allow catch-up contributions

00:05:55:06 - and will not violate the universal applicability rules.

00:05:58:08 - However, only those participants that are not subject to the Roth mandate,

00:06:02:11 - meaning those that earn under $145,000 can continue to make catch-up contributions

00:06:07:10 - after the January 1st, 2026. Roth catch-up required.

00:06:11:06 - Participants in these plans

00:06:12:12 - will not be allowed to make any catch-up contributions at all.

00:06:16:06 - The other thing the final regulation clarified

00:06:18:09 - is that a plan cannot require that all catch-up contributions be Roth.

00:06:22:20 - So this was a theory

00:06:23:19 - that some plan sponsors were exploring in order to ease administration.

00:06:27:17 - The proposed regulation noted this was not an available option,

00:06:30:22 - and the final regulation called it out even more forcefully, saying no,

00:06:35:09 - you cannot require all employees to make catch-up

00:06:37:14 - contributions as Roth contributions.

00:06:39:15 - We also get some clarity around the definition and determination

00:06:42:17 - of FICA wages.

00:06:44:03 - The final regulation clarified that FICA wages are defined as those

00:06:47:11 - that are included in box three of the W2, which is Social Security wages.

00:06:52:04 - However, the final regulation also notes that if for some reason

00:06:56:01 - the plan sponsor cannot determine FICA wages under box three of the W2

00:07:00:04 - for this transition year, then plan sponsors can use

00:07:02:21 - box five of W2 form, which is Medicare wages.

00:07:06:16 - We've had a lot of questions from plan sponsors about how to determine

00:07:10:06 - FICA wages, particularly around plans

00:07:12:05 - that have members of a control group or other participating employers.

00:07:15:19 - The good news is that the final regulation does allow employers

00:07:18:22 - to aggregate for purposes of determining that FICA wage cap.

00:07:23:00 - So if an employer sponsoring the plan is part of a controlled group,

00:07:27:04 - they can consolidate wages for purposes of determining

00:07:29:18 - whether a participant exceeds $145,000.

00:07:33:01 - They can also aggregate if they're using what's called a common paymaster.

00:07:37:15 - Another

00:07:38:01 - bit of good news from the final regulation is the clarification

00:07:41:04 - that if an individual doesn't have FICA wages for the preceding year,

00:07:44:17 - they would not be subject to that mandatory Roth catch-up provision.

00:07:48:02 - Thank you for that

00:07:48:20 - very helpful clarifying information, Janet.

00:07:51:11 - The proposed regulation talked about a deemed Roth

00:07:55:03 - election option available to plan sponsors.

00:07:58:04 - Can you talk a little bit more about this and how the final regulation

00:08:02:01 - differs from the proposed regulation issued in January?

00:08:06:09 - Certainly, much of what was in the proposed

00:08:08:16 - regulation is consistent in the final regulations, but

00:08:11:17 - we had some key clarifications around deemed Roth catch-up elections.

00:08:16:01 - So for those that may not be familiar, this concept was introduced

00:08:19:13 - by the proposed regulation.

00:08:20:23 - And it allows plan to provide that once any Roth

00:08:24:00 – catch-up required participant elects to make pre-tax contribution,

00:08:27:22 - those contributions may be automatically treated or deemed

00:08:31:07 - as Roth catch-up contributions after the participant hits

00:08:34:08 - a designated limit, be that for a 402(g), 415 or plan limit

00:08:39:01 - without having that participant need to make an affirmative catch-up election.

00:08:43:09 - This deemed Roth election option can be applied to both spillover or,

00:08:47:03 - as we call it, the single source plans, as well as separate source plans.

00:08:51:17 - Importantly, however, participants must be given an effective opportunity

00:08:56:00 - to choose a different election if plans decide to choose this option.

00:09:00:00 - The proposed regulation had very little information

00:09:02:16 - as to what effective opportunity meant, and unfortunately

00:09:06:03 - we didn't get any additional clarity there in the final regulation.

00:09:10:00 - When determining whether a participant has an effective opportunity,

00:09:13:17 - a plan sponsor will need to look

00:09:15:03 - at the facts and circumstances surrounding the situation.

00:09:18:06 - So what we do know is that there is no explicit

00:09:21:07 - notice requirement or notice period for that effective opportunity,

00:09:25:01 - but communications to participants are strongly recommended.

00:09:28:23 - We did get additional clarity on the deemed election option

00:09:31:20 - as it applies to separate source plans, which states that those plans

00:09:35:20 - are allowed to treat separate catch-up elections as Roth,

00:09:39:04 - even if those contributions

00:09:40:15 - ultimately turn out not to qualify as catch-up contribution.

00:09:44:14 - For example, say you have a participant that makes a separate election

00:09:47:23 - for Roth catch-up, but they never actually hit the 402(g) limit.

00:09:51:18 - Those monies aren't actually catch-up dollars

00:09:53:15 - but they can remain categorized as Roth monies

00:09:56:21 - and don't have to be recharacterized as pre-tax contributions.

00:10:01:00 - Is there anything else that the final regulation

00:10:03:16 - clarified with respect to the deemed Roth election option?

00:10:07:23 - Yes. A new point around the deemed Roth option

00:10:11:01 – addresses a participant's change in status.

00:10:13:19 - That is, if they no longer fall into the Roth catch-up required category.

00:10:17:18 - For example, if you're Roth catch-up required in 2026,

00:10:21:12 - but you now have reduced compensation and therefore are no longer Roth catch-up

00:10:25:22 - required in 2027, the deemed Roth catch-up election must stop

00:10:30:01 - within a reasonable period.

00:10:31:22 - Again, reasonable period is not explicitly defined in the final regulation,

0:10:36:04 - but effectively it means that you need to reset someone if they're changing status

00:10:40:13 - so that they would go back to the original deferral

00:10:42:21 - without having the deemed Roth election applied to them.

00:10:46:08 - The final regulation also clarified that if a plan is utilizing

00:10:49:20 - the deemed Roth election feature, it must be noted in the plan document.

00:10:54:06 - And lastly, we received more clarifying

00:10:56:18 - guidance around correcting Roth contribution failures,

00:11:00:02 - some of which is specific to the deemed Roth election option.

00:11:03:11 - Can you tell us a bit more about the correction methods available for Roth

00:11:07:07 - catch-up, both with respect to the deemed election option and more broadly?

00:11:12:12 - Sure.

00:11:13:10 - The proposed regulation

00:11:14:17 - outlined a number of correction methods available to plan sponsors.

00:11:18:12 - The correction method that's available to all plans,

00:11:20:23 - whether or not your deeming is a return of the erroneous pre-tax catch-up.

00:11:25:14 - So if you had a participant

00:11:26:20 - that was supposed to be a Roth catch-up required, but catch up

00:11:30:05 - contributions were made on a pre-tax basis and not a Roth basis,

00:11:34:08 - then the only way to correct that in a non-deeming situation

00:11:37:20 - is to return those catch-up contributions to the participant.

00:11:40:22 - However, if your plan is utilizing the deemed Roth election option,

00:11:45:04 - you can take advantage of two additional correction methods.

00:11:48:02 - Plan sponsors can as one option, transfer

00:11:51:01 - any pre-tax catch-up contributions that should have been Roth to

00:11:54:16 - Roth catch-up and reissue a W2. As a second option,

00:11:58:01 - the plan sponsor can complete what is effectively a Roth in-plan

00:12:01:16 – conversion and issue a 1099 to that participant.

00:12:04:21 - So plans that choose the deemed Roth election option

00:12:07:16 - get some added benefits from a correction standpoint.

00:12:11:04 - The final regulation did give us some good news

00:12:13:17 - around the flexibility and timing of corrections.

00:12:16:09 - Unlike the proposed regulations, which required uniform correction

00:12:19:19 - methods for all participants, the final regulation allows plan

00:12:23:19 - sponsors to apply corrections to similarly situated participants.

00:12:27:21 - The final regulation

00:12:29:00 - also extends correction deadlines, which vary by type of failure.

00:12:33:06 - So if you had a failure that was due to a 402(g) excess,

00:12:36:19 - the correction must be completed by the end of the taxable year

00:12:39:16 - following the year of the erroneous catch-up.

00:12:42:03 - If you had a failure for a different reason, such as exceeding the 415 limit

00:12:46:05 - or other plan limit, or an ADP failure, you have until the end of the plan

00:12:50:12 - year following the year of the failure to make that correction.

00:12:54:06 - It's important to note that the additional time for corrections

00:12:56:23 - is limited to issues involving the plan's application

00:13:00:02 - of the Roth catch-up provisions, and other corrections,

00:13:03:09 - such as tax treatment of excess deferrals, will still apply.

00:13:06:16 - Plan sponsors will want to review these correction rules carefully.

00:13:10:07 - We also got some good news around relief from the

00:13:12:23 - need to make corrections, which includes a de minimis amount.

00:13:16:06 - This means that if you have a failure that's under $250,

00:13:19:22 - you don't have to do that correction at all.

00:13:22:09 - Another instance in which a correction is not required is if a participant

00:13:26:05 - had a catch-up failure and subsequently took a full distribution of their account

00:13:30:05 - before you could get it corrected.

00:13:31:21 - So again, some good news there in the correction space.

00:13:35:13 - One more topic I want to make sure to address is dual

00:13:38:16 - qualified Puerto Rico plans.

00:13:41:01 - Does the final regulation address this? Yes.

00:13:44:13 - And we received some good news around dual qualified Puerto Rico plans.

00:13:48:07 - The proposed regulation

00:13:49:14 - contained an interesting concept for dual qualified Puerto Rico plans.

00:13:53:08 - Because Puerto Rico law does not currently allow Roth contributions to a plan,

00:13:58:02 - the proposed regulation indicated that plan sponsors of dually qualified

00:14:02:00 - Puerto Rico plans could satisfy the Roth catch-up contribution requirement

00:14:06:11 - by having traditional after-tax contributions added to the plan.

00:14:10:12 - The final regulation

00:14:11:16 - reversed this position and indicated that a dually qualified plan

00:14:15:13 - will satisfy the Roth catch-up contribution requirement

00:14:18:18 - If the plan allows Roth catch-up for only U.S.

00:14:21:13 - employees unless and until

00:14:24:02 - the Puerto Rico code is updated to provide for Roth contributions.

00:14:27:17 - Thanks, Janet.

00:14:28:19 - As our final topic, can you talk about how the final regulation

00:14:32:10 – addresses other provisions like higher catch-up. Yes.

00:14:36:11 - The final regulation did provide some additional clarity with respect

00:14:39:17 - to the higher catch-up provision, which allows participants ages 60 to 63

00:14:44:13 - to make additional catch-up contributions beyond the standard catch-up limit.

00:14:48:16 - In addition

00:14:49:05 - to confirming that the higher catch-up provision is optional for plan sponsors,

00:14:53:05 - the final regulation does provide that if a plan wants to offer higher catch-up

00:14:57:01 - limits for participants ages 60 to 63, the plan does require a plan amendment

00:15:02:04 - to allow for that optional provision, even if the plan document incorporates

00:15:06:10 - catch-up contributions by reference to Internal Revenue Code section 414 V.

00:15:10:21 - One other point of clarification for the higher catch-up provision is that

00:15:14:01 - if a plan chooses to provide higher catch-up contributions,

00:15:17:05 - it must generally offer them

00:15:18:13 - to all eligible participants under the universal availability rule,

00:15:22:14 - with the exception of collectively bargained employees and nonresident aliens.

00:15:26:23 - Therefore, a plan could prevent only non-collectively bargained employees

00:15:30:20 - ages 60 to 63 to make higher catch-up contributions

00:15:34:05 - without violating the universal applicability rule.

00:15:37:13 - Before we end, I just want to review a checklist of actions,

00:15:40:15 - particularly for the Roth catch-up provision the plan sponsors

00:15:43:18 - should be aware of as this deadline draws near.

00:15:46:20 - To ensure you're prepared for the Roth catch-up provision,

00:15:49:20 - plan sponsors should ensure your payroll provider is ready

00:15:53:13 - for January 1st, 2026, effective date.

00:15:56:23 - Get the final wage template to Vanguard

00:15:59:06 - as soon as possible after the last payroll of the year,

00:16:02:12 - and make sure your employees are informed of how they will be impacted

00:16:06:22 - before the provision takes effect on January 1st, 2026.

00:16:11:08 - Janet, thank you so much for your time today.

00:16:14:03 - We appreciate your expertise and insightful explanation.

00:16:17:20 - Thank you.

00:16:18:10 - It was a pleasure

00:16:19:05 - and I'm sure we'll be talking soon about another one of SECURE 2.0's

00:16:22:11 - many provisions as more guidance continues to be issued in the coming

00:16:26:03 - months.

00:16:27:01 - Vanguard will continue to lean into Roth catch-up resources

00:16:30:12 - to help plan sponsors implement it and navigate its complexities.