As we discussed in our earlier overview of SECURE 2.0, the legislation enacted in December 2022 includes a broad array of changes to the retirement plan landscape. Among the most significant—and most complex—are two provisions that expand the role of Roth contributions in employer-sponsored retirement plans. Section 601 of the Act mandates that certain catch-up contributions be made on a Roth basis, while Section 604 permits employers to make matching and nonelective contributions as Roth contributions for the first time. Both provisions present meaningful planning opportunities, but they also create substantial administrative challenges for plan sponsors.

Mandatory Roth Catch-Up for High Earners

Beginning January 1, 2024, employees who earned more than $145,000 in FICA wages from the employer in the preceding year must make their catch-up contributions on a Roth (after-tax) basis. This provision applies to 401(k), 403(b), and governmental 457(b) plans. Employees who earned $145,000 or less retain the option to make catch-up contributions on either a pre-tax or Roth basis, as permitted by the plan.^[1]

The $145,000 threshold is indexed for inflation and is based on the employee's FICA wages from the employer in the prior calendar year—not on the employee's total household income or adjusted gross income. This means that the determination must be made on an employer-by-employer basis. An employee who earns $100,000 from each of two employers would not be subject to the mandatory Roth requirement at either employer, while an employee earning $150,000 from a single employer would be subject to the requirement at that employer.

The practical implications for plan sponsors are significant. Recordkeeping systems must be updated to identify employees who exceeded the $145,000 threshold in the prior year and to ensure that their catch-up contributions are directed to a Roth account. For the 2024 plan year, this determination will be based on 2023 FICA wages, which means that payroll and recordkeeping systems need to begin tracking this data now. Plan sponsors should be in contact with their recordkeepers to confirm that the necessary system updates are underway.

One open question involves employees who made catch-up contributions on a pre-tax basis under the prior rules. The statute does not provide a transition period or grandfather rule—as of January 1, 2024, the mandatory Roth requirement applies. Plan sponsors and recordkeepers are awaiting further IRS guidance on the operational mechanics of this provision, including how to handle situations where an employee's prior-year wages are not yet determined at the time catch-up contributions begin in the new year.

Optional Roth Employer Contributions

Section 604 of SECURE 2.0 creates an entirely new planning opportunity by permitting employers to make matching and nonelective contributions on a Roth basis. Previously, all employer contributions were required to be made on a pre-tax basis, regardless of the employee's deferral election. Under the new provision, a plan may allow an employee to elect to receive some or all employer matching or nonelective contributions as Roth contributions. This provision is effective for contributions made after December 29, 2022.^[2]

For employees who prefer Roth treatment—particularly high-income employees who anticipate being in a similar or higher tax bracket in retirement—this provision allows a greater share of total plan contributions to receive Roth treatment. Consider a 55-year-old employee earning $200,000 per year who defers the maximum amount ($22,500 plus a $7,500 catch-up contribution) and receives a 6 percent employer match. Under prior law, the $12,000 employer match was always pre-tax. Under SECURE 2.0, the employee can now elect to have that $12,000 match treated as a Roth contribution, bringing the total Roth contribution to $42,000 if the employee also elects Roth treatment for deferrals.

There is an important tradeoff: Roth employer contributions are includable in the employee's gross income in the year of contribution. Unlike Roth employee deferrals, which are funded with after-tax dollars the employee has already earned, Roth employer contributions are new income to the employee. Employers must ensure that employees understand the current tax impact before electing Roth treatment for employer contributions, and that payroll systems are prepared to report the additional income. The employer's tax deduction for the contribution is not affected by the employee's Roth election.

Implementation Timeline and Practical Considerations

The January 1, 2024 effective date for the mandatory Roth catch-up requirement creates a tight implementation timeline. Plan sponsors, recordkeepers, and payroll providers must coordinate to ensure that systems can identify affected employees, redirect catch-up contributions to Roth accounts, and properly report the contributions on Form W-2. For plans that do not currently offer a Roth contribution option, the mandatory catch-up requirement effectively forces the adoption of a Roth feature, which may require plan amendments, updated enrollment materials, and employee communications.

There are also unresolved questions about the interaction of the mandatory Roth catch-up with nondiscrimination testing. The IRS has not yet issued comprehensive guidance on how the new Roth provisions will be administered for testing purposes, and plan sponsors should be attentive to future guidance on this topic. Similarly, the interaction of the Roth employer contribution option with the existing rules on highly compensated employee limits and aggregate contribution limits will require careful analysis.

For plan sponsors evaluating whether to adopt the optional Roth employer contribution feature, the decision should be informed by the demographics and preferences of the employee population. In a workforce with many high-income employees who already make Roth deferrals, the ability to extend Roth treatment to employer contributions may be a meaningful benefit. In a workforce where most employees prefer pre-tax contributions, the administrative complexity of offering Roth employer contributions may not be justified. Employers should work with their plan advisors and tax professionals to model the impact of these provisions before making plan design changes.

The Roth provisions of SECURE 2.0 represent a significant expansion of Roth opportunities within employer-sponsored plans. While the mandatory catch-up requirement presents immediate implementation challenges, the optional Roth employer contribution opens long-term planning possibilities that were previously unavailable. Plan sponsors who begin addressing these provisions now—rather than waiting for the 2024 deadline—will have a meaningful advantage in ensuring a smooth transition and maximizing the benefit for their employees and their businesses.