SECURE Act 2.0: Changes Affecting High Wage Earners

SECURE 2.0 introduces a new wrinkle for high wage earners participating in certain employer-sponsored retirement plans [e.g. 401(k), 403(b), etc.] that will require catch-up contributions to such accounts be given Roth tax treatment.

Effective 2024, if an employee had wages exceeding $145,000 (to be indexed for inflation) from the plan sponsor in the previous calendar year, all elective catch-up contributions to the employee’s account in the current calendar year must be made to a plan Roth account.

Example 1. Susan, age 56, participates in her employer ABC Corporation’s 401(k) plan. Her 2023 wages form ABC were $155,000. Because she earned more than $145,000 in 2023, any elective catch-up contribution she wishes to make to her 401(k) account in 2024 must be made to the plan’s Roth option. Susan will not be able to make a catch-up contribution in 2024 if ABC does not offer a Roth option to it's plan participants.

Note that catch-up contributions to a plan Roth account will be made on an after-tax basis. Furthermore, employers are not required to offer a Roth option with their plan offerings. If an employer’s plan does not offer a Roth option, then a high wage earner will not be able to make catch-up contributions to her account. High wage earners will be dependent upon the employer updating their plans to offer a Roth option if they do not currently. Fortunately, employers have all of 2023 to make the necessary plan updates to add a Roth option to enable high wage earners to make catch-up contributions after 2023.

This Roth catch-up requirement applies in the case where the employee had wages paid in the preceding calendar year from the employer sponsoring the plan. If an employee receives more than $145,000 from one employer in 2023, but changes employers in 2024, then that individual’s 2023 wages from the prior employer will not be used to determine whether he will required to make catch-up contributions to a Roth account in his new employer’s plan for 2024.

Example 2. Same as Example 1, but Susan changes employers in February 2024. Her new employer ACME, Inc., offers a Roth account option in its 401(k) plan. However, because Susan did not work for ACME in 2023, her wages from ABC are not taken into account in 2024 for catch-up contributions. Thus, Susan will be able to make elective catch-up contributions to her ACME sponsored pre-tax 401(k) account.

This Roth restriction only applies to individuals having wages in excess of $145,000. Thus, it does not apply to self-employed individuals.

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