SECURE 2.0 Section 603: Roth Catch-Up Contributions

The SECURE 2.0 Act introduced a change for retirement savers through Section 603, which mandates Roth treatment for catch-up contributions made by certain high-income employees. This provision alters how individuals aged 50 and over can make additional contributions to their retirement plans, moving these specific contributions from a pre-tax to an after-tax basis. The rule was delayed, with compliance now expected by January 1, 2026.

The Mechanics of Roth Employer Contributions

The core mechanism of Section 603 is a mandate affecting high-earning employees who are eligible for catch-up contributions in 401(k), 403(b), and governmental 457(b) plans. Under this provision, if an employee’s Federal Insurance Contributions Act (FICA) wages from their employer in the preceding calendar year exceed a certain threshold, any catch-up contributions they make must be designated as Roth contributions. The statutory threshold is $145,000, and this amount is indexed for inflation.

This requirement changes the tax nature of these specific contributions. Traditionally, all catch-up contributions could be made on a pre-tax basis, lowering an employee’s current taxable income. Now, for this group of high earners, the contributions are made with after-tax dollars. This means the amount of the catch-up contribution is included in the employee’s gross income for the year it is made, resulting in a higher tax bill for the employee in the present.

From the employer’s perspective, the tax treatment remains consistent with traditional contributions. The employer is still able to claim a tax deduction for the amount of the catch-up contribution, even though it is designated as Roth and included in the employee’s income. This ensures the employer’s financial incentive to offer retirement benefits is not negatively impacted.

A key detail of this provision is its interaction with plan features. If a company’s retirement plan does not currently include a Roth contribution option, high-earning employees at that company are effectively barred from making any catch-up contributions. To comply with Section 603, the employer must add a Roth feature to their plan.

Key Considerations for Employees

For an employee subject to the Section 603 mandate, the decision-making process centers on a tax trade-off. By making mandatory Roth catch-up contributions, the employee forgoes an immediate tax deduction and pays income tax on the contribution amount now. The benefit of this approach materializes in retirement, as qualified withdrawals from the Roth account, including all investment earnings, are completely tax-free. This contrasts with pre-tax contributions, which provide an upfront tax break but are fully taxed upon withdrawal in retirement.

The central factor in evaluating this trade-off is the comparison between an employee’s current marginal tax rate and their anticipated tax rate during their retirement years. An employee who expects to be in a higher tax bracket in retirement than they are today would generally benefit from the Roth treatment. Conversely, an employee who anticipates being in a lower tax bracket after retiring might prefer a traditional pre-tax contribution to maximize tax savings during their peak earning years.

This strategic consideration is particularly relevant for those affected by the wage threshold, as they are already in a relatively high income bracket. They must assess their future income sources, potential changes in tax law, and their expected lifestyle in retirement to make an informed projection.

It is also important for employees to understand how these contributions are defined. The FICA wage calculation used to determine eligibility for the mandate includes salary, bonuses, and commissions from the current employer. Wages from a previous employer are not aggregated, and the calculation is not prorated for those employed for only part of a year. An individual who did not have FICA wages from the employer in the prior year would not be subject to the mandatory Roth catch-up rule.

Administrative Steps for Plan Sponsors

For employers, or plan sponsors, implementing Section 603 requires a series of administrative actions. The first step is a strategic decision to accommodate the mandate, which is particularly pressing if the plan does not currently offer a Roth contribution option. If the decision is to proceed, the employer must formally amend their plan document to reflect the new rules and to add a Roth feature if one is not already present.

Following the plan amendment, operational adjustments are necessary. The sponsor’s payroll system must be updated to handle the specific tax withholding and reporting for these mandatory Roth catch-up contributions. The payroll system must be configured to correctly identify affected employees based on prior-year FICA wages and apply the correct tax treatment to their catch-up deferrals.

Finally, the plan sponsor must establish a clear and efficient process for employees to manage their contributions under this new rule. This includes creating or updating election forms and online portals so that high-earning employees can make their mandatory Roth catch-up elections. Communication is a large part of this step; sponsors need to inform affected participants about the change, explain how it works, and provide them with the tools to make or adjust their elections accordingly.