Q: We employ several individuals who will have eligible wages in excess of $145,000 for 2023 and will thus be required to defer any catch-up amounts as Roth in 2024, per the SECURE 2.0 Act. However, we also have a few individuals whose eligible wages will be EXACTLY $145,000 in 2023. Will they still be able to defer catch-up contributions on a pre-tax basis? Also, is the $145,000 amount indexed in future years?
Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:
A: Typically, to answer questions involving dollar amounts in a statute, you turn directly to the statute, and this question is no exception. Section 603 of the SECURE 2.0 Act of 2022 contains the following sections (boldface text is the Experts’ emphasis):
SEC. 603. ELECTIVE DEFERRALS GENERALLY LIMITED TO REGULAR CONTRIBUTION LIMIT. (a) APPLICABLE EMPLOYER PLANS.—Section 414(v) is amended by adding at the end the following new paragraph: “(7) CERTAIN DEFERRALS MUST BE ROTH CONTRIBUTIONS.— (A) IN GENERAL.—Except as provided in subparagraph (C), in the case of an eligible participant whose wages (as defined in section 3121(a)) for the preceding calendar year from the employer sponsoring the plan exceed $145,000, paragraph (1) shall apply only if any additional elective deferrals are designated Roth contributions (as defined in section 402A(c)(1)) made pursuant to an employee election.
“(E) COST OF LIVING ADJUSTMENT.—In the case of a year beginning after December 31, 2024, the Secretary shall adjust annually the $145,000 amount in subparagraph (A) for increases in the cost-of-living at the same time and in the same manner as adjustments under 415(d); except that the base period taken into account shall be the calendar quarter beginning July 1, 2023, and any increase under this subparagraph which is not a multiple of $5,000 shall be rounded to the next lower multiple of $5,000.’’
Thus, individuals who earn precisely $145,000 in eligible wages (generally Form W-2 Box 3 or 5, depending on whether the employee has tips) in 2023 will indeed be able to make traditional pre-tax catch-up deferrals in 2024, and the $145,000 threshold will be indexed in future years in increments of $5,000.
NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.
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