Catch-ups, Auto Enroll, and RMDs -- Oh my!

It’s been a busy few weeks for the IRS. Grab a cup of coffee and dive into the latest proposed guidance impacting qualified retirement plans.?

On January 10, 2025, the IRS issued proposed regulations providing essential guidance on implementing the SECURE 2.0 Act, focusing solely on mandatory Roth catch-up contributions and their impact on employers and retirement plan participants. These updates clarify critical requirements and introduce new options for employers and participants alike.?

Here's what you need to know about these proposed regulations, why they matter, and how employers should prepare.

Starting January 1, 2026, employees earning more than $145,000 in Federal Insurance Contributions Act (FICA) wages from the prior year must make catch-up contributions on a Roth (after-tax) basis. The $145,000 threshold will be indexed annually for inflation. The proposed regulations clarify several key points related to this rule:

• Employer-specific threshold: The $145,000 threshold is based on FICA wages earned from the participant's common-law employer sponsoring the plan without considering controlled group rules.
• Traditional pre-tax option remains: Participants earning $145,000 or less must still have the option to make traditional pre-tax catch-up contributions, meaning plans cannot require Roth-only catch-ups for all participants.
• Deemed Roth elections: Plans may treat a participant’s pre-tax election as a deemed Roth election for those subject to the Roth catch-up rule, provided the plan allows participants to subsequently change their elections.
• No mandatory Roth program: Plans without a Roth contribution option cannot permit Roth catch-up contributions. If such a plan does not add a Roth feature, high earners subject to the Roth catch-up rule will be unable to make catch-up contributions. However, participants not subject to this rule can still make traditional pre-tax catch-ups.

To support compliance, the IRS has introduced correction methods for plans failing to meet the Roth catch-up requirement. These include using Form W-2 corrections and in-plan Roth rollovers, with deadlines consistent with other error-correction timelines.

Increased Catch-Up Limits for Ages 60-63

Another significant update under SECURE 2.0 is the introduction of higher catch-up limits for individuals aged 60 through 63, effective January 1, 2025. The proposed regulations confirm that:

• Participants aged 60-63 may contribute up to the greater of $10,000 (indexed for inflation) or 150% of the standard age-50 catch-up limit from the prior year. For 2025, this amount is $11,250.
• These increased limits are optional for plans. Employers may choose not to implement them and instead apply the same catch-up limits to all eligible participants.
• Plans using the higher limits for ages 60-63 will not violate universal availability rules under Code Section 414(v).

For those turning 64, the limit reverts to the standard catch-up contribution amount. Similar provisions apply to SIMPLE IRAs but with lower thresholds.

Two-Year Administrative Transition Period

Acknowledging the complexity of these changes, the IRS has established a two-year transition period. Plans can continue to accept pre-tax catch-up contributions through 2025 while adjusting systems, plan documents, and participant communications to comply with the Roth catch-up requirement.

Why These Proposed Rules Matter

These proposed regulations provide clarity and flexibility for implementing SECURE 2.0’s provisions. They ensure that participants have tax-advantaged savings options, while employers gain a clearer framework for compliance. However, the new Roth-only requirement for high earners introduces administrative challenges, particularly for plans that do not currently offer Roth contributions.

To prepare for these changes, employers should:

1. Evaluate Plan Features: Review whether your plan includes a Roth contribution option. If not, consider adding one to accommodate high-earning participants.
2. Update Payroll and Plan Systems: Modify systems to track the $145,000 earnings threshold and facilitate Roth contributions for eligible participants.
3. Amend Plan Documents: Ensure documents reflect the Roth catch-up requirements and optional higher limits for participants aged 60-63.
4. Implement Correction Procedures: Adopt procedures for correcting errors under the proposed regulations, including in-plan Roth rollovers.
5. Communicate with Participants: Clearly explain the upcoming changes, emphasizing the benefits of Roth contributions and the availability of higher catch-up limits for eligible participants.

These updates mark a significant step in improving retirement savings opportunities while creating new responsibilities for employers. Proactive planning and collaboration with plan administrators and legal counsel will help ensure a smooth transition and compliance with these regulations.

On January 10, 2025, the IRS issued proposed regulations clarifying the mandatory automatic enrollment (AE) provisions introduced by SECURE 2.0.?

These proposed rules aim to define how and when the automatic enrollment requirements apply to new and existing retirement plans, particularly focusing on small businesses, rehired employees, plan mergers, and multiple employer plans (MEPs).?

The following provides a summary of key aspects of the proposed guidance.

Key Highlights of the Proposed Regulations

1. Required Terms for Automatic Enrollment Plans subject to AE requirements must adopt an Eligible Automatic Contribution Arrangement (EACA) under Code Section 414(w). This includes:

• Uniform default contribution rates of 3%–10% with automatic annual increases up to 15%.
• The option for participants to withdraw their automatic contributions within 90 days of the first contribution.

2. Coverage of Employees The rules clarify that all employees eligible to make salary deferrals must be included in the EACA, including:

• Long-term part-time employees.
• Employees hired before the AE requirements’ effective date who have not made affirmative elections.

However, if a participant has an existing affirmative deferral election—including an election not to defer any compensation—on the date the plan becomes subject to the AE requirements, that election can remain in place, and the participant is not required to be automatically enrolled.

3. Rehired Employees Plans may treat rehired employees as new employees if they are ineligible for default contributions for an entire plan year. For example, an employee rehired two years after termination could be automatically re-enrolled at the original default rate.

4. New and Small Businesses SECURE 2.0 exempts:

• Employers with fewer than 10 employees.
• Employers in existence for less than three years.

The proposed regulations clarify that AE requirements begin at the start of the plan year after the three-year mark. Employee counts follow COBRA rules, counting full-time employees as one and part-time employees on a fractional basis.

5. Multiple Employer Plans (MEPs) and Pooled Employer Plans (PEPs) The AE requirements apply on an employer-by-employer basis within MEPs and PEPs. A pre-enactment plan or a plan from a small or new employer joining a MEP or PEP does not automatically become subject to AE requirements.

6. Plan Mergers and Spin-Offs

• Mergers of two pre-enactment plans remain exempt from AE requirements.
• Mergers involving one plan subject to AE requirements generally make the merged plan subject to AE.
• Spin-off plans derived from pre-enactment plans retain their pre-enactment status.

7. Plan Amendments Most plan amendments do not trigger AE requirements. However, amendments related to mergers or adopting MEPs must be reviewed for compliance.

8. Participant Notices Plans subject to AE requirements must provide EACA notices. Still, they may combine these with other participant notices, such as those for default investments, safe harbor plan status, or Pension-Linked Emergency Savings Accounts. Reminder notices for unenrolled participants are permitted in place of full annual notices.

It’s important to note that these regulations are still proposed and may be subject to change before finalization.

Why Do These Proposed Rules Matter?

These proposed regulations provide clarity for employers navigating the complexities of SECURE 2.0’s automatic enrollment requirements. By addressing exemptions for small and new businesses, defining the treatment of rehired employees, and detailing the application of AE requirements to MEPs and PEPs, the IRS aims to streamline compliance and ensure broader retirement plan access for employees.

For small businesses and employers considering MEPs or PEPs, these rules reduce uncertainty, enabling better planning and more confident decision-making.?

For employees, the regulations promote retirement savings through enhanced participation, particularly among long-term part-time workers.

What Should Employers Do Now?

While these rules remain proposed, employers should proactively prepare by:

• Reviewing Plan Design: Ensure existing or new plans align with AE requirements if applicable.
• Understanding Exemptions: Small and new businesses should assess whether they qualify for exemptions and when the AE requirements may take effect.
• Consulting Experts: Seek guidance from benefits professionals to understand the application of these rules to MEPs, PEPs, or plan amendments.
• Updating Notices: Prepare for updated notification requirements for participants and ensure compliance once finalized regulations are in place.
• Staying Informed: Monitor updates from the IRS as these regulations move toward finalization.

By taking these steps, employers can remain compliant while supporting the retirement readiness of their employees.

The IRS recently announced a delay in the effective date for certain proposed retirement plan regulations. These rules, originally set to take effect on January 1, 2025, have been postponed to January 1, 2026, as outlined in IRS Announcement 2025-2, issued on December 18, 2024.?

While these regulations remain in the proposal stage, they preview the changes that retirement plan sponsors and administrators must implement in the coming years.

What’s Being Delayed?

The delay applies to several complex areas of retirement plan management, including:

• Surviving Spouses: A proposed rule allows a surviving spouse to be treated as the participant, enabling delayed withdrawals and more favorable calculation methods.
• Partial Annuities: Guidance on combining partial annuities with retirement accounts, including how withdrawals are calculated when both are involved.
• Roth Accounts After Death: Updates on handling Roth accounts when the original account holder passes away, especially when these accounts are combined with pre-tax balances.
• Correcting Missed Withdrawals: Clarifications on how to address missed required withdrawals without penalties.
• Divorce and Qualified Longevity Annuity Contracts (QLACs): Adjustments for individuals who experience a divorce after purchasing these specialized investments.

The extension reflects the IRS's recognition of the challenges employers, plan administrators and financial institutions face in implementing these changes.

What’s Still on Schedule for 2025?

While some rules have been delayed, others remain on track to take effect on January 1, 2025. These include:

• A new required beginning date for withdrawals from retirement accounts for individuals born in 1959, based on an age of 73.
• Clarifications on dividing retirement accounts left to beneficiaries, particularly when trusts are involved.
• The applicable rollover rules for distributions of designated Roth accounts.

Why Do These Proposed Rules Matter?

Although the regulations are not yet final, they highlight the IRS's priorities and provide a roadmap for what retirement plan sponsors and administrators should expect. The additional year offers valuable time to:

• Adapt systems and processes.
• Prepare plan documents to reflect the changes.
• Communicate effectively with employees about potential updates to their retirement plans.

This extended timeline can help avoid last-minute compliance efforts once the final rules are issued.

What Should Employers Do Now?

To stay ahead, employers and plan administrators should:

1. Monitor Updates: Keep track of IRS announcements and the progress of these proposed regulations.
2. Consult Experts: Engage with retirement plan advisors, legal counsel, and financial professionals to evaluate how these proposals may impact your plans.
3. Prepare Systems and Processes: Use the additional time to review and update systems to ensure readiness when the final regulations take effect.