As the Roth catch-up contributions become effective this month, issues not addressed in the final regulations are coming to light.
Question: Our company completed a statutory merger — how does that impact the Roth catch-up contributions requirement?
Answer: Based on past IRS guidance, it is more than likely that an employee of either company in a statutory merger that was subject to the Roth catch-up contribution requirements of SECURE 2.0 Act prior to the statutory merger will continue to be subject to the Roth catch-up contribution requirements after the merger. Similarly, if the statutory merger occurs midyear, the employee’s compensation for the year of the merger will include compensation paid by either entity.
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). The definition of wages is 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).
Impact of a Merger
In Revenue Ruling 62-60, the IRS held that where two companies are combined in a statutory merger (meaning a merger performed pursuant to a state’s corporate law), the FICA taxes paid by either entity prior to the merger are to be considered in determining FICA obligations going forward. The newly merged company should be regarded as the “same taxpayer and the same employer” for FICA tax purposes. Accordingly, the contributions made by one company (or by an employee of one company) prior to the merger are to be considered when determining what additional amount of FICA taxes should be withheld or contributed going forward.
The Roth catch-up contribution final regulations state that a person’s employer for determining whether the individual has received compensation in excess of $150,000 (as adjusted) is the individual’s common law employer. The final regulations are silent on the impacts of a statutory merger.
However, based on the IRS’s prior guidance, it would be consistent to consider the wages paid by either entity prior to the merger in determining the $150,000 threshold and the individuals subject to the Roth catch-up requirements. Thus, even though the surviving entity may not have been the common law employer of the employee in the prior calendar year, the wages paid by the non-continuing entity to a statutory merger should be considered in determining whether the Roth catch-up contribution rules apply after the statutory merger.
Example. Sarah, age 52, works for Company A and had $175,000 reported in Box 3 of her Company A Form W-2 for 2025. On April 1, 2026, Company A merges with Company B (an unrelated entity) in a statutory merger, and Company B is the continuing entity. Although Sarah was not an employee of Company B in 2025 (and therefore received $0 in wages from Company B in 2025), Sarah should still be considered a highly compensated individual subject to the Roth catch-up contribution requirements for 2026 in the Company B 401(k) Plan because of her Company A wages paid in 2025. In addition, for determining whether Sarah is a highly compensated individual for 2027, Sarah’s 2026 compensation should be the sum of her FICA wages paid by Company A and Company B in 2026.
If you have any questions, please reach out to your Faegre Drinker benefits counsel.
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