SECURE 2.0 and the final IRS regulations on Roth catch-up contributions introduce a significant administrative consideration for employers and plan administrators: how does the Roth-only catch-up rule apply to rehired employees?
Background
Section 603 of the SECURE 2.0 Act requires catch-up contributions to be made as after-tax Roth contributions if the contributing employee received wages in the prior calendar year that exceed $150,000 (and as adjusted for inflation). Wages are defined as FICA wages (as reported in Box 3 of Form W-2) paid by the employee’s common law employer in the prior year (or paid by a common paymaster or other company-controlled group member if the company has elected permissive aggregation of wages).
Employees Rehired in the Same Calendar Year
If an employee is rehired within the same calendar year after separating from service, the determination of whether Roth-only catch-up contributions are required is made by looking at the employee’s FICA wages from the employer (or aggregated group, if elected) for the preceding calendar year. If those wages exceed the threshold, the rehired employee is required to make any catch-up contributions as Roth contributions for the remainder of the calendar year, provided the employee is otherwise eligible. This remains true regardless of any break in service during the year.
Employees Rehired in a Different Calendar Year
For employees who are rehired in a different calendar year after separating from service, the rule is similar: review the FICA wages the employer (or aggregated group, if elected) paid to the employee in the calendar year preceding the year of rehire. If those wages exceeded the Roth catch-up threshold, the employee must make any catch-up contributions as Roth contributions in the year of rehire. However, if the rehired employee did not have any FICA wages from the employer (or aggregated group, if elected) in the prior calendar year, the Roth catch-up requirement does not apply, and the employee may make catch-up contributions on a pre-tax or Roth basis according to plan terms. The key is that the rule always looks back to the prior calendar year’s wages from the employer (or aggregated group).
If you have any questions about Roth catch-up contribution requirements, please reach out to the Faegre Drinker benefits team.
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