On January 10, 2025, the IRS issued proposed regulations that include guidance on Section 603 of the SECURE 2.0 Act of 2022 (SECURE 2.0) related to the mandatory Roth treatment of catch-up contributions for those who earned more than $145,000 (adjusted for inflation) in the previous calendar year while working for the employer sponsoring the plan. Under SECURE 2.0 and the guidance in the proposed regulations, a participant who earned more than the $145,000 Roth catch-up compensation threshold in the previous calendar year must have their catch-up contributions designated as Roth contributions. See the “Roth Catch-Up Compensation Threshold” section below for details on how this term is defined. This article will focus on how this provision specifically affects multiemployer defined contribution (DC) 401(k) plans.

Roth catch-up compensation threshold

For purposes of this provision, compensation for the $145,000 threshold is defined as Federal Insurance Contributions Act (FICA) wages as defined in Internal Revenue Code (IRC) Section 3121(a), which generally includes all taxable salary, wages, bonuses, commissions, tips, and fringe benefits subject to Social Security and Medicare taxes. It generally includes elective deferral contributions participants make to 401(k) or similar plans and excludes employer contributions, certain fringe benefits, and nontaxable benefits. The $145,000 threshold is determined for the previous calendar year based on compensation from the “employer sponsoring the plan.”

Multiemployer industry groups questioned whether Section 603 of SECURE 2.0 applied to multiemployer plans because these plans are sponsored by a board of trustees consisting of union representatives and employer representatives and not an “employer.” In the guidance issued in the proposed regulations, this concept was rejected. However, the proposed regulations’ guidance does reinforce earlier guidance in IRS Notice 2023-62, the proposed regulations stating that “a catch-up eligible participant’s FICA wages for the preceding calendar year from one participating employer in an applicable employer plan that is maintained by more than one employer (including a multiemployer plan) would not be aggregated with the participant’s FICA wages for the preceding calendar year from another participating employer in the plan for purposes of determining whether the participant’s FICA wages for that year exceeded the Roth catch-up wage threshold.” Therefore, if a participant eligible for catch-up earned FICA wages with more than one employer in the previous calendar year, these wages will not be aggregated for purposes of meeting the inflation-adjusted $145,000 Roth catch-up compensation threshold. This will certainly help minimize the eligible participant population subject to this catch-up provision, but there will be situations where catch-up-eligible participants will exceed the Roth catch-up compensation threshold, subjecting them to the mandatory Roth catch-up contribution treatment.

When this article uses the term “Roth catch-up compensation threshold” it means the inflation-adjusted $145,000 in FICA wages from the employer sponsoring the plan in the previous calendar year, where the employer sponsoring the plan means the participant’s common law employer, without aggregating compensation from other employers.

Plans without Roth provision

Another concern was that many multiemployer DC plans offer the ability to make pretax 401(k) contributions only; meaning they do not allow for Roth contributions. The concern was that plan sponsors would need to eliminate the catch-up contribution provision for everyone in the plan if trustees decided this wasn’t something they could administer properly. The proposed regulations address this by explaining that catch-up-eligible participants who earned less than the Roth catch-up compensation threshold in the previous calendar year will still be allowed to make catch-up contributions on a pretax basis but those who earned more than that amount will not. While this is a more favorable result than eliminating catch-up contributions for everyone, it still prevents higher earners, who are most likely to make catch-up contributions, from doing so. Alternatively, plan sponsors can add a Roth contribution option to their plans, which would allow those who exceed the Roth catch-up compensation threshold who are subject to the mandatory Roth catch-up contribution provision to make catch-up contributions on a Roth-only basis.

Correction methods

Under the proposed regulations’ guidance, plan sponsors will have a couple of different methods to correct errors where catch-up contributions were made on a pretax basis when they should have been made on an after-tax basis as designated Roth contributions.

1. Form W-2 correction method. The first correction method is to adjust the participant’s Form W-2 for the year of the error to characterize the amount of the improper pretax catch-up contributions (unadjusted for gain or loss) as Roth contributions, after having transferred the improper pretax elective deferral contributions (adjusted for gain or loss) to the participant’s designated Roth account in the plan. However, this method cannot be used if the Form W-2 has already been filed with the IRS or distributed to the participant. Because employers need to provide employees with a Form W-2 by January 31 of the following year, this is a very short window to correct the mistake and is likely not a viable option for most because these types of errors will likely not be discovered by this date.
2. In-plan Roth rollover correction method. The other correction method is to process an in-plan Roth rollover for the amount of the improper pretax catch-up contributions (adjusted for gain or loss) to the participant’s designated Roth account in the plan. In this case, the participant will receive a Form 1099-R for the year of the in-plan Roth rollover reporting that full amount (including the gain or loss) as taxable income. Plan sponsors can choose which method to use each year but the same correction method must be used for all participants.

Having a deemed Roth catch-up election provision is a prerequisite for plans to be able to use either of the two new correction methods. Under the proposed regulations, having a deemed Roth catch-up election means that the plan will automatically treat any catch-up contributions from participants who are subject to the mandatory Roth catch-up treatment as designated Roth contributions, even if the participant elected to make only pretax elective deferral contributions. However, affected participants must have an opportunity to choose a different election, for example to stop making additional elective deferrals.

Not having a deemed Roth catch-up election provision would mean that any pretax catch-up contributions that are required to be designated Roth contributions would not be eligible to be corrected under the two new correction methods. Instead, the plan would have to make the correction by distributing the improper pretax catch-up contributions (adjusted for gain or loss) to the participant.

Decision points for trustees of multiemployer plans

In the coming year, trustees will need to take these factors into account to decide the best way to proceed. Below are the key decision points:

• Offer Roth elective deferral contributions? If the plan currently only allows pretax elective deferral contributions, decide whether to offer Roth elective deferral contributions.
• If the decision is to not offer Roth contributions, then catch-up-eligible participants who earned more than the Roth catch-up compensation threshold in the previous calendar year will not be allowed to make catch-up contributions. Catch-up-eligible participants who earned less will be allowed to make catch-up contributions on a pretax basis. No further decisions will need to be made, but the plan will need to monitor to ensure no catch-up-eligible participants who earned more than the Roth catch-up compensation threshold in the previous year are allowed to make catch-up contributions.
• If the decision is to offer Roth contributions, then the Roth option must be available to all catch-up-eligible participants. For plans that offer catch-up contributions and a Roth option, if any catch-up-eligible participant would be required to make any catch-up contributions as designated Roth contributions for a year because they earned more than the Roth catch-up compensation threshold, then all catch-up-eligible participants must be allowed to make their catch-up contributions as designated Roth contributions for that year. The plan will need to be monitored to ensure any participant that earned more than the Roth catch-up compensation threshold has all catch-up contributions made as Roth contributions.
• Remove all catch-up contributions? As a last resort, if trustees feel that it will be too administratively cumbersome to obtain compensation data from employers to accurately determine whether FICA wages of catch-up-eligible participants are above or below the Roth catch-up compensation threshold, then they need to decide to remove the catch-up contribution provision from the plan, impacting all participants who would otherwise be catch-up-eligible. While this would be an unfortunate outcome, it is a realistic option in a multiemployer setting.
• Deemed Roth catch-up elections? If Roth elective deferral contributions are allowed in the plan and all catch-up-eligible participants are allowed to make catch-up contributions, decide to amend the plan to include a deemed Roth catch-up election provision that will allow for in-plan Roth rollovers so that improper pretax catch-up contribution errors can be fixed under that methodology.

Conclusion

In the coming months, trustees of multiemployer plans will need to become educated on this topic in order to decide what is best for their plans and members. In discussions, the administrative aspect of Roth catch-up contributions should also be considered. In order to monitor the provision effectively, it will likely need to be coordinated with several parties: the recordkeeper, the Fund Office or third-party administrator (TPA), and the employer. One of the reasons many multiemployer 401(k) plans have moved to a safe harbor plan design is because the gathering of compensation for nondiscrimination testing purposes was cumbersome. Regardless of whether a plan offers Roth elective deferral contributions, if it allows for catch-up contributions, then at the very least it will need employers to report any catch-up-eligible participants who had compensation that exceeded $145,000 (as adjusted for inflation) in FICA wages in the previous calendar year. Therefore, the difficulty of obtaining this information should be a consideration. For collectively bargained plans, the mandatory Roth catch-up requirement becomes effective the later of (1) January 1, 2026, or (2) the first taxable year that begins after the date the last collective bargaining agreement (CBA) relating to the plan in effect on December 31, 2025, terminates (ignoring any extension). Thus, while there is some time to make these decisions, it makes sense to start the discussions now.