WASHINGTON — The Internal Revenue Service announced today that the amount individuals can contribute to their 401(k) plans in 2025 has increased to $23,500, up from $23,000 for 2024.
The IRS today also issued technical guidance regarding all cost‑of‑living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2025 in Notice 2024-80 PDF, posted today on IRS.gov.
Highlights of changes for 2025
The annual contribution limit for employees who participate in 401(k), 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan is increased to $23,500, up from $23,000.
The limit on annual contributions to an IRA remains $7,000. The IRA catch‑up contribution limit for individuals aged 50 and over was amended under the SECURE 2.0 Act of 2022 (SECURE 2.0) to include an annual cost‑of‑living adjustment but remains $1,000 for 2025.
The catch-up contribution limit that generally applies for employees aged 50 and over who participate in most 401(k), 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan remains $7,500 for 2025. Therefore, participants in most 401(k), 403(b), governmental 457 plans and the federal government’s Thrift Savings Plan who are 50 and older generally can contribute up to $31,000 each year, starting in 2025. Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in these plans. For 2025, this higher catch-up contribution limit is $11,250 instead of $7,500.
The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the Saver’s Credit all increased for 2025.
Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or the taxpayer’s spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor the spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.) Here are the phase‑out ranges for 2025:
For single taxpayers covered by a workplace retirement plan, the phase-out range is increased to between $79,000 and $89,000, up from between $77,000 and $87,000.
For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is increased to between $126,000 and $146,000, up from between $123,000 and $143,000.
For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range is increased to between $236,000 and $246,000, up from between $230,000 and $240,000.
For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
The income phase-out range for taxpayers making contributions to a Roth IRA is increased to between $150,000 and $165,000 for singles and heads of household, up from between $146,000 and $161,000. For married couples filing jointly, the income phase-out range is increased to between $236,000 and $246,000, up from between $230,000 and $240,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $79,000 for married couples filing jointly, up from $76,500; $59,250 for heads of household, up from $57,375; and $39,500 for singles and married individuals filing separately, up from $38,250.
The amount individuals can generally contribute to their SIMPLE retirement accounts is increased to $16,500, up from $16,000. Pursuant to a change made in SECURE 2.0, individuals can contribute a higher amount to certain applicable SIMPLE retirement accounts. For 2025, this higher amount remains $17,600.
The catch-up contribution limit that generally applies for employees aged 50 and over who participate in most SIMPLE plans remains $3,500 for 2025. Under a change made in SECURE 2.0, a different catch-up limit applies for employees aged 50 and over who participate in certain applicable SIMPLE plans. For 2025, this limit remains $3,850. Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in SIMPLE plans. For 2025, this higher catch-up contribution limit is $5,250.
Details on these and other retirement-related cost-of-living adjustments for 2025 are in Notice 2024-80 PDF, available on IRS.gov.
On Monday, June 24, 2024, a federal judge for the US District Court for the Northern District of Texas (the Court) instituted a nationwide injunction on the enforcement of portions of the US Department of Labor’s (DOL) 2023 rulemaking titled “Updating the Davis-Bacon and Related Acts Regulations,” (2023 Final Rule) holding that the 2023 Final Rule had overstepped the statutory directive of the Davis-Bacon Act (DBA). For a refresher on the 2023 Final Rule, please see this alert published by Cozen O’Connor last year.
The Court found that the plaintiffs in this case had a likelihood of success on the merits because the 2023 Final Rule exceeded its statutory mandate in three main ways:
The 2023 Final Rule, at Section 5.5(e), which made DBA contract clauses on labor standards and wage determination effective by operation of law even when those clauses were omitted from a contract covered under the DBA, was found to be contrary to existing law;
The 2023 Final Rule unlawfully amended the DBA by applying it to other workers (specifically truckers) who are not laborers and mechanics performing “directly on the site of the work.”1; and
The 2023 Final Rule wrongfully defined Material Supplier, thereby unlawfully expanding the scope of DBA coverage.
Each of these issues bears careful attention and review by any contractor (or subcontractor) performing under a DBA-covered contract or subcontract. Although we expect the DOL to appeal this decision, the issuance of a nationwide injunction bars the DOL from enforcing of any of these provisions.
Self-Implementing Contract Clauses
Section 5.5(e) of the 2023 Final Rule reads as follows:
Incorporation by operation of law.
The contract clauses set forth in this section (or their equivalent under the Federal Acquisition Regulation), along with the correct wage determinations, will be considered to be a part of every prime contract required by the applicable statutes referenced by § 5.1 to include such clauses and will be effective by operation of law, whether or not they are included or incorporated by reference into such contract unless the Administrator grants a variance, tolerance, or exemption from the application of this paragraph. Where the clauses and applicable wage determinations are effective by operation of law under this paragraph, the prime contractor must be compensated for any resulting increase in wages in accordance with applicable law.
This operation of law provision drew significant commentary during the comments period and raised significant concerns within the DBA community. In a nutshell, the provision made the DBA applicable to contracts even where an agency had failed to include the required DBA clauses, effectively rendering the application of the DBA as self-implementing. In effect, this shifted the burden of determining DBA coverage from agency contracting officers to contractors. After a recent oral argument and extensive briefing, the Court held that this section was contrary to law. The Court cited the fact that both the Supreme Court of the United States and the Armed Services Board of Contract Appeals have ruled that the Davis-Bacon Act is not self-implementing.2 The Court also rejected the DOL’s argument that the DBA clauses should be read into the contract under the Christian doctrine and found that, as written, the operation of law provision is not consistent with basic contract and procedural due process principles. As a result, contractors performing work covered by the DBA can, at least for now, rely on the four corners of the contract for determining coverage by the DBA.
Extending the DBA Beyond Laborers and Mechanics to Truckers
Another aspect of the new DBA regulations challenged by the plaintiffs was DOL’s expansion of the scope of coverage of the rule in Section 5.2 to workers beyond laborers and mechanics and to workers not employed directly on a work site. DOL had attempted to expand the scope of covered work under the DBA by including transportation as a covered category in the 2023 Final Rule. On this issue, the Court determined that the DOL’s 2023 Final Rule had overstepped its authority delegated by Congress by expanding the DBA to cover time spent by drivers on site. The Court stated in no uncertain terms that trucking is not covered by the DBA: “Expanding the DBA to apply to trucking impermissibly conflicts with the statute, which defines its coverage and is limited to “construction, alteration, or repair, including painting and decorating, of public buildings and public works…”3 Truck drivers are not de facto “mechanics and laborers employed directly on the site of the work.”4 Citing a “substantial body of case law,” the Court noted that DOL’s attempt to include transportation drivers under the DBA is misplaced. Overall, the Court’s clear rejection of DOL’s attempt to expand the scope of DBA coverage to truck drivers prevents DOL from continuing to require truck driver coverage by way of the Court’s injunction striking down relevant portions of Section 5.2 of the 2023 Final Rule.
The 2023 Final Rule Wrongfully Defined Material Supplier
One other change in the 2023 Final Rule challenged by the plaintiffs was the attempt by DOL to apply DBA coverage to certain material suppliers operated by subcontractors or contractors. Again, the Court found that the DBA only applies to mechanics and laborers employed directly on the site of work, and any attempt to expand DBA coverage to material suppliers is contrary to law and would amount to a fundamental amendment to the DBA. The Court also held that treating material suppliers as covered by the DBA would result in a reclassification of employees of material suppliers as laborers and mechanics, violating the DBA’s plain language. Furthermore, from a practical standpoint, this reclassification would result in an arbitrary and capricious delineation of DBA coverage between employees who work for a material supplier operated by a subcontractor or contractor and employees who work for a material supplier unaffiliated with a contractor/subcontractor. As such, the Court included in its injunction the definition of Material Supplier set forth in 29 C.F.R. § 5.2, thus thwarting DOL’s attempt to expand the scope of the DBA to include certain material suppliers.5
Conclusion
The Court’s injunction covering Section 5.5(e) and portions of Section 5.2 of the 2023 Final Rule limits the scope of these changes and, in many ways, takes the DBA back to the basics: only mechanics and laborers are covered by the DBA. In addition, by striking down the DOL’s operation of law provision, the Court also refocused DBA coverage issues back to a review of the clauses and terms included in a solicitation or contract.
The SECURE 2.0 Act is a recently enacted significant piece of legislation that has brought about substantial changes to the retirement account rules in the United States. These changes affect retirement savings plans such as 401(k), 403(b), IRA, Roth accounts, and related tax breaks.
The primary objective of SECURE 2.0 is to encourage more workers to save for retirement. However, complex changes have confused some taxpayers and plan sponsors. Therefore, it is important to understand the key points of the law.
Here’s what you need to know.
Overview
SECURE 2.0 Act retirement plan changes
More than 90 provisions in SECURE 2.0 cover all types of retirement savings plans. Some requirements are in place as of 2023. Other provisions become effective this year, in 2024, or later years, i.e., 2025, 2026, or 2027.
Some changes in SECURE 2.0 involve:
RMD Age Rules and Penalties
Higher 401(k) Catch-up Contributions
Automatic Enrollment Changes
Emergency Withdrawal Flexibility
529 Plan Roth Rollovers
A Student Loan Payment 401(k) Match
This SECURE 2.0 summary highlights key provisions of the new law and potential implications for your retirement planning.
Required Minimum Distributions
SECURE Act 2.0 RMD changes
2023 RMD age change. Under the law before SECURE 2.0, you generally had to take required minimum distributions (RMDs) from your retirement plan beginning at age 72. SECURE 2.0 increased the required minimum distribution age to 73 as of January 1, 2023. However, if you turned 72 in 2022, you had to take your first RMD by April 1, 2023.
The bump to age 73 is one of several new RMD rules. However, the RMD age eventually moves to 75.
Delays in the age for taking RMDs raise tax implications and can present practical challenges. The latter can be particularly significant for retirees with lower incomes, who typically use RMDs to cover living expenses.
For example, pushing the RMD age back might be a “nonevent” for some retirees, according to Paul Camhi, vice president and senior financial advisor at The Wealth Alliance, who told Kiplinger, “Most [older adults] can’t afford to wait until 72 [to take RMDs], let alone until age 75.”
RMD rule delay for inherited IRAs. The IRS is again delaying the implementation of IRA RMD final rules, this time until 2025.
With previous IRS relief, penalties are waived for missed RMDs from specific IRAs inherited in 2020, 2021, 2022, and 2023.
(Missing an RMD or failing to take the appropriate distribution amount incurs a 25% IRS penalty — down from 50% due to SECURE 2.0 RMD penalty changes — added to the amount that should have been withdrawn.) However, the penalty can be as low as 10%.
IRS transition relief has been offered due to confusion over the timing of required plan payouts and implementation of related legislative changes.
The latest RMD rule delay allows beneficiaries of inherited IRAs to understand distribution requirements better and take payouts. The extension offers more time to roll over distributions from earlier this year that were mischaracterized as RMDs.
RMDs and Roth 401(k)s. Beginning this year (2024), the SECURE 2.0 Act eliminates RMDs for qualified employer Roth 401(k) plan accounts.
Previously, there was a difference in the rules that applied to Roth 401(k) accounts in employer plans versus Roth IRAs (i.e., the latter were not subject to required minimum distributions).
As a result, it is important to consider how SECURE 2.0 RMD changes could impact you and plan accordingly.
SECURE 2.0 401(k) Changes
How does SECURE 2.0 affect 401(k)?
SECURE 2.0 contains numerous provisions that impact 401(k) plans. These provisions take effect in various years but deal with issues including financial incentives to contribute to a retirement plan, hardship withdrawal rules, automatic enrollment, contributions limits, and part-time worker access.
Each is mentioned below.
401(k) Financial Incentives
Small incentives to contribute to a retirement plan. The SECURE 2.0 Act allows your employer to offer small financial incentives (e.g., low-dollar gift cards) to help boost employee participation in a workplace retirement plan.
This provision became effective beginning January 2023.
Withdrawal Rules 2024
SECURE 2.0 hardship withdrawal
Emergency expense distributions. Beginning in 2024, under the SECURE 2.0 Act, you will be allowed to take an early “emergency” distribution from your retirement account to cover unforeseeable or immediate financial needs.
That emergency distribution of up to $1,000, could only be taken once during the year, but won’t be subject to the usual additional 10 percent tax that applies to early distributions.
But: if you choose not to repay the distribution within a certain time, you won’t be allowed to take other emergency distributions for three years.
Other hardship withdrawals are provided for in the SECURE 2.0 Act including 403(b) plans.
(Currently, distribution rules for 403(b) and 401(k) plans are different, so SECURE 2.0 would conform to those rules.)
Also, under SECURE 2.0, penalty-free withdrawals, on small amounts of money from retirement plans in cases involving domestic abuse, will be allowed.
Automatic enrollment in retirement plans. Beginning in 2025, the SECURE 2.0 Act expands automatic enrollment in retirement plans. The rationale is that automatic enrollment in 401(k) plans has been shown to increase participation.
According to the U.S. Department of Labor, “Whether you already have a 401(k) plan or are considering starting one, automatic enrollment 401(k) plans offer many advantages.”
In addition to helping small businesses attract and retain employees, the Labor Department points to tax advantages associated with 401(k) participation (including the deduction of employer contributions and deferred taxation on contributions and earnings until distribution).
With some exceptions for small businesses, SECURE 2.0 requires 401(k) and 403(b) plans to automatically enroll eligible participants, who can opt out of participation.
Contributions Limits
SECURE Act 401(k) contribution limit
Higher catch-up contribution limit. Right now, if you are 50 or older you can make catch-up contributions to your retirement plan up to certain limits. SECURE 2.0 increases those limits, beginning in 2025, to the greater of $10,000 or 50 percent more than the regular catch-up amount if you are 60, 61, 62, or 63 years old. After 2025, those amounts will be indexed for inflation.
Also, as of 2024, SECURE 2.0 Act rules, which are now delayed, were designed to impact how eligible workers with incomes over $145,000, make catch-up contributions. (The income threshold will be adjusted for inflation.) See below for more information on the delay of this rule to 2026.
Catch-up Contributions
SECURE 2.0 Roth catch-up contributions
Under SECURE 2.0, if you are at least 50 years old and earned $145,000 or more in the previous year, you can make catch-up contributions to your employer-sponsored 401(k) account. But you would have to make those extra contributions on a Roth basis, using after-tax money.
You couldn’t get tax deductions on those catch-up contributions as you would with typical 401(k) contributions, but you could withdraw the money tax-free when you retire.
The SECURE 2.0 Roth catch-up contribution rule won’t apply to taxpayers making $144,999 or less in a tax year.
Note: The Roth catch-up rule was originally supposed to take effect in 2024. However, due to problems with implementing Roth catch-up contributions, the IRS announced that Roth catch-up contributions for high earners age 50 or over won’t be required until 2026. (That’s a two-year delay of the new rule.)
Keep in mind, however, that those catch-up contributions will eventually (in 2026), have to be made on a Roth basis if your income meets or exceeds the $145,000 threshold.
Employer fund match for student loan payments. Under the SECURE 2.0 Act, your employer can make a matching contribution to your retirement plan account based on your student loan payment amount. This is designed to address the fact that high student loan debt can keep people from saving for retirement. This will become effective in 2024.
Note: Student loan payments resumed in fall 2023 since student loan debt forgivenesswas been struck down by the U.S. Supreme Court.
529 Plan Rollovers
529 SECURE Act Roth IRA
Roth rollover option for 529 plans. Beginning in 2024, SECURE 2.0 changes 529 plan rules.
In limited circumstances (i.e., there are a lot of requirements that must be met including that the Roth IRA account must be in the name of the 529 plan beneficiary), some people may be able to rollover a 529 plan that they have maintained for at least 15 years to a Roth IRA.
Annual limits for the rollover would have to be within the annual contribution limit and there will be a $35,000 lifetime limit on what can be rolled to the Roth IRA.
Saver’s match. Beginning in 2027,the SECURE 2.0 Act replaces the nonrefundable Saver’s Credit for some IRA and retirement plan contributions with a federal matching contribution that will be deposited into your IRA or retirement plan. The so-called “Saver’s Match” will be 50% of IRA or retirement plan contributions up to $2,000 per person. However, some income limits and phase-outs will apply.
The SECURE 2.0 Act contains many more provisions that could impact your retirement savings account (and in turn, potentially your taxes and tax breaks).
Some of those provisions involve everything from part-time worker access to employer retirement plans, and small business tax credits, to contributions to SIMPLE, and SEP plans.
Other provisions address issues surrounding stock ownership and savings bonds. Consult a financial advisor or trusted tax professional if you have questions or concerns about how these changes might impact you or your taxes.
Lost Accounts
Lost 401(k) accounts database
Retirement savings “lost and found.” Have you ever lost track of your 401(k)? Well,the SECURE 2.0 Act enables the creation of a searchable database to help people find retirement benefits that they lost track of. The retirement savings “lost and found” will be housed at the Department of Labor and be created within the next two years.
Data show that millions of 401(k) accounts are regularly forgotten, amounting to nearly a trillion dollars in unclaimed retirement benefits.
WASHINGTON, March 28—Associated Builders and Contractors and its Florida First Coast chapter filed suit today in federal court to stop the Biden administration’s unlawful scheme to mandate project labor agreements on construction contracts procured by federal agencies. ABC’s complaint asserts that President Joe Biden lacks the legal and constitutional authority to impose a new federal regulation injuring economy and efficiency in federal contracting and illegally steering construction contracts to certain unionized contractors, which employ roughly 10% of the U.S. construction workforce.
ABC estimates the Biden pro-PLA policy will affect at least 180 federal construction contracts valued at $16 billion across America on an annual basis, including several federal construction contracts for projects in Jacksonville and dozens of projects in Florida and the Southeast.
“ABC seeks a national injunction against President Biden’s executive overreach, which makes a mockery of federal procurement laws and rewards powerful special interests with government construction contracts at the expense of taxpayers and the principles of fair and open competition in government procurement,” said Ben Brubeck, ABC vice president of regulatory, labor and state affairs. “ABC has heard from large and small federal contractors—including firms signatory to union agreements—and concerned federal agency contracting officers that the Biden administration’s controversial PLA policy has already stifled competition and raised costs on federal construction contracts in Florida and across the country. This policy will continue to do so absent a successful legal challenge.”
“When mandated by government agencies, PLAs needlessly increase construction costs by 12% to 20%, reduce opportunities for qualified large and small contractors and their craft and noncraft employees, and exacerbate the construction industry’s worker shortage of more than half a million people by discriminating against the nearly 90% of the industry workforce that is not unionized,” said Brubeck. “PLAs discourage competition by forcing contractors to sign union collective bargaining agreements, which require them to follow inefficient and cumbersome union work rules, hire most or all workers from union halls and apprenticeship programs, accept compulsory union representation on behalf of any remaining members of its existing workforce and expose them to union wage theft of up to 34% of their compensation unless they join a union and vest in union benefits plans.”
ABC and its Florida First Coast chapter filed the lawsuit in the U.S. District Court for the Middle District of Florida in Jacksonville in response to the Federal Acquisition Regulatory Council’s Dec. 22, 2023, final rule––and the related Dec. 18, 2023, White House Office of Management and Budget Memo––implementing President Biden’s Feb. 4, 2022, Executive Order 14063, which mandates PLAs on federal construction projects of $35 million or more.
In its legal filing, ABC asserted that the Biden administration’s PLA rule is beyond the scope of executive authority and violates the Constitution, the First Amendment and the Administrative Procedure Act. The complaint also notes that the rule violates the Federal Property Administrative Services Act, the Competition in Contracting Act, the National Labor Relations Act, the Office of Federal Procurement Policy Act and the Regulatory Flexibility Act, among others, by limiting competition and forcing large and small businesses to sign union agreements as a condition of winning a federal contract for construction services.
ABC members won 54% of the $205.56 billion in federal contracts worth $35 million or more during fiscal years 2009-2023 and built award-winning projects safely, on time and on budget, without unnecessary government-mandated PLAs.
Members of the House of Representatives and the Senate Thursday issued a “discussion draft” for the much-anticipated bill applying technical corrections to the SECURE 2.0 Act of 2022.
Restoring Catch-Ups
The bill would make corrections to several mistakes made in the hallmark retirement law. First and foremost, it corrects the most egregious error of SECURE 2.0: accidentally removing catch-up contributions, starting in 2024. The drafters of SECURE 2.0 originally intended to create a higher catch-up limit for those aged 60 to 63, sometimes called super-catch-ups, and in the rush to pass a budget in December 2022, they made this now-infamous error. The corrections bill would make the original intent effective without removing catch-up contributions.
In light of their original intent, the IRS announced in August it will permit catch-up contributions to be made into 2024, even though SECURE 2.0 technically removes the concept from the code. This means catch-ups would be safe, even if the corrections bill is passed after December 31.
Though not a technical error, strictly speaking, and more an error in judgment, the IRS announced in the same guidance that it would extend to January 1, 2026, from January 1, 2024, the effective date for employees making $145,000 or more to make catch-up contribution on a Roth, or after-tax, basis. The corrections bill does not speak to this issue, presumably because the IRS has already addressed it through guidance.
Matching Starter 401(k) Limits to IRAs
The corrections bill would also explicitly tie the maximum contribution amount for Starter 401(k) plans to the annual maximum for individual retirement accounts. SECURE 2.0 previously set the maximum for Starter plans at $6,000 indexed, which was the IRA limit in 2022, but that provision was not set to take effect until 2024, when the IRA limit is set to become $7,000, effectively making the Starter limit both less than and divorced from the IRA limit. The correction effectively says that the Starter limit will match the IRA limit.
Additionally, the provision in SECURE 2.0 changing required mandatory distributions would also be corrected to reflect the intent of the drafters, which was to increase the age to 73 starting on January 1, 2023, and age 75 starting on January 1, 2033.
Further, the legislation would change the effective date for the 15% ceiling on automatic escalation found in Section 101 of SECURE 2.0. Plans started since SECURE 2.0’s passage must adopt auto-enrollment at 3% to 10%, then escalate by 1% to an end range between 10% and 15%, unless the participant elects otherwise. The corrections bill would move the date for the 15% ceiling on escalation to January 1, 2026, instead of 2025, leaving the ceiling at 10% in the meantime.
Other provisions in SECURE 2.0 received minor clerical corrections, including the Saver’s Match and plan lost and found.
Timing Dependent on Budget—Again
Michael Kreps, a principal in and chair of Groom Law Group’s retirement services group, says, “There was some hope from industry that there would be a more comprehensive ‘fix-it’ package, but there does not appear to be an appetite on Capitol Hill to relitigate substantive issues.”
Substantive issues, such as the decision to permit 403(b) plans to use collective investment trusts, are not part of the bill because their omission was not technical in character. The Retirement Fairness for Charities and Educational Institutions Act would address it, but no action has been taken since it passed the House Committee on Financial Services in May.
Assuming the corrections bill is attached to a budget bill, it will have two opportunities to pass, given the staggered nature of the expirations of the November continuing resolutions that extended federal spending to January 19 and February 2.
The IRS is delaying, until 2026, a rule mandating that catch-up contributions for certain high-income taxpayers be treated as Roth contributions.
A $145,000 income threshold, indexed for inflation, is not tied to existing definitions of highly compensated employees.
Starting in 2025, a separate catch-up contribution will be permitted for taxpayers between 60 and 63 years old.
The Internal Revenue Service has offered a two-year delay for the Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act’s mandate that all catch-up contributions for certain high-income taxpayers be treated as Roth contributions.
Still, many plan sponsors and participants have been wondering about the details that will determine how the rule is implemented in practice.
In the same guidance that delayed the formal effective date of the Roth catch-up mandate, the IRS answered some pressing questions — and acknowledged that additional questions remain to be answered in forthcoming guidance.
Secure 2.0 & Catch-Up Contributions: The Basics
For company-sponsored retirement plans, including 401(k)s and 403(b) plans, the catch-up contribution limit is $7,500 in 2023. Starting in 2025, a separate catch-up contribution is permitted for taxpayers who are between ages 60 and 63. That contribution limit will be equal to the greater of (1) $10,000 or (2) 150% of the standard catch-up contribution limit for 2024. The $10,000 limit will also be indexed for inflation. Once the taxpayer turns 64, the standard catch-up contribution limit applies.
Starting in 2026, after the two-year IRS delay, if a taxpayer has income of at least $145,000 for the prior year, the catch-up contribution for the subsequent year must be treated as a Roth contribution. That means these funds are contributed with after-tax dollars, so they will not reduce current taxable income but can be withdrawn tax-free in the future. The $145,000 amount will also be indexed for inflation.
The $145,000 threshold is new and is not tied to existing definitions of highly compensated employees. That amount is also tied to W-2 income, so if an S corporation owner takes $130,000 in compensation but also receives additional profits from the corporation, the owner will not have crossed the $145,000 threshold to trigger the Roth contribution rule.
Similarly, many expected that the new Roth contribution rule would not apply to sole proprietors, partners in partnerships, or LLC members who are taxed as sole proprietors. That’s because these taxpayers are considered self-employed and, by definition, do not receive W-2 compensation.
IRS Guidance on the Roth Catch-Up Mandate
In Notice 2023-62, the IRS delayed the effective date of the new Roth catch-up rule to 2026. The IRS also confirmed that the definition of wages for purposes of the Roth mandate includes only those that are subject to FICA taxes (so amounts that are reported in Box 3 of a taxpayer’s Form W-2).
The IRS clarified that if an employee subject to the Roth catch-up requirement elects to make catch-up contributions on a pretax basis, the plan sponsor can disregard that election and treat the catch-up as a Roth contribution.
When multiple employers sponsor the same 401(k) and an employee has wages from more than one employer, the amounts will not be aggregated for purposes of determining whether the employee is subject to the Roth mandate.
The IRS has requested comments on whether employers should be required to either offer a Roth option or eliminate catch-up contributions altogether (in other words, whether an employer should be permitted to not offer a Roth option and limit catch-up contributions to lower-paid employees who are eligible to make pretax catch-up contributions). Under current law, offering a Roth contribution option is at the discretion of employer-sponsored retirement plans.
Conclusion
The Roth catch-up contribution requirement is much more complex than it appears. It is expected that additional guidance and clarification will be forthcoming before the mandate formally becomes effective. Of course, plan sponsors and participants should start planning now to be ready for the future changes.
Original Article Provided By: https://www.thinkadvisor.com/2023/09/27/roth-catch-up-mandate-in-secure-2-0-the-devilish-details/
The construction industry added 19,000 jobs on net in July, according to an Associated Builders and Contractors analysis of data released today by the U.S. Bureau of Labor Statistics. On a year-over-year basis, industry employment has expanded by 198,000 jobs, an increase of 2.5%.
Nonresidential construction employment increased by 10,600 positions on net, with growth in two of the three subcategories. Nonresidential building added 10,500 positions, while heavy and civil engineering added an additional 2,200 jobs. Nonresidential specialty trade lost 2,100 jobs on net.
The construction unemployment rate rose to 3.9% in July. Unemployment across all industries declined from 3.6% in June to 3.5% last month.
“The economy is slowing, and inflation remains problematic,” said ABC Chief Economist Anirban Basu. “While many economists have reversed their predictions of a near-term recession and conclude that the Federal Reserve will be able to engineer a soft landing, today’s report is a reminder that risks remain. Not only is the economy slowing, but wage pressures remain. Accordingly, the war on excess inflation has not yet been won, which means that the Federal Reserve may not be done raising rates.
“That said, nonresidential construction contractors continue to expand their payrolls,” said Basu. “General and public works contractors collectively hired thousands of people in July. However, weakness in several commercial real estate segments may help explain job losses among nonresidential contractors last month. Nonetheless, construction worker wages continue to grow rapidly in the context of structural skills shortages. According to data from the ADP Pay Insights report, construction workers who stayed at their job saw a 6.4% wage increase over the past year, or more than twice the rate of inflation.
“ABC’s Construction Confidence Index indicates that contractors will collectively continue to expand staffing for the rest of 2023,” said Basu. “That will presumably keep upward pressure on industry wages even if the broader economy continues to soften.”
Fifty retirement-related organizations sent a letter to the Treasury Department and specifically the IRS on July 19 requesting “transition relief” for Section 603 under the SECURE 2.0 Act.
The signers—representing advocacy organizations (including the American Retirement Association), large corporations and municipal pension funds—asked for more time to comply with a requirement that catch-up contributions for individuals that make more than $145,000 be made on a Roth basis. As the letter states, it may be seen as a straightforward requirement, yet there are numerous administrative recordkeeping and payroll hurdles that must be overcome, many of which require guidance from Treasury and the IRS.
“Plan sponsors, along with their payroll vendors and in-house payroll, and their service providers are working to implement this provision; however, because of the many outstanding issues that require Treasury guidance, it is proving difficult to implement this on a timely basis,” the letter reads. “Even with the guidance, this change is an enormous undertaking requiring significant coordination among multiple parties and the development, testing, integration, and implementation of entirely new systems which will take substantial time to comply.” SEE FULL TEXT OF THE LETTER HERE
The parties worry that without additional time for compliance, many plan sponsors will simply discontinue catch-up contributions all together.
“This latest Coalition letter to the IRS and Treasury asking for a two-year transition relief from the Section 603 mandatory Roth catch-up provision in the SECURE 2.0 Act is intended as a follow-up from the initial Coalition letter to Capitol Hill on this issue last month,” explains Andrew Remo, Director of Federal & State Legislative Affairs for the American Retirement Association. “The ARA, along with many other retirement industry stakeholders, remains concerned that catch-up contributions will be effectively eliminated beginning next year if nothing is done.”
Specifically, according to wording in the legislation, beginning in 2024, no participants will be able to make catch-up contributions (pre-tax or Roth).
That’s the result of the elimination of a subparagraph in the body of the legislation to allow for a conforming amendment—but in the process inadvertently eliminated the ability to make any pre-tax catch-up contributions, ARA CEO Brian Graff said Monday. In addition, since under current law Roth catch-up contributions can only be made for amounts that could have been excluded from income but for the Roth election—the current legislative text puts all such future contributions at risk.
ARA already alerted the Treasury Department and the Joint Committee on Taxation about the error in January.
Agency seeks to increase awareness of requirements related to federal contracts
The U.S. Department of Labor’s Wage and Hour Division will begin offering online seminars for contracting agencies, contractors, unions and workers on the requirements for paying prevailing wages on federally funded construction and service contracts.
According to the agency, which said the seminars are part of its effort to increase awareness and improve compliance, the seminars will include recorded training videos on a variety of Davis-Bacon Act and Service Contract Act topics that participants can view on demand. The division will then offer live Q&A sessions to provide additional information.
Q&A sessions on compliance issues related to the Davis-Bacon Pact will be offered June 27 and Sept. 13. The Service Contract Act Q&A sessions will be June 28 and Sept. 14.
“Prevailing wage laws are key to ensuring that construction and service jobs are good jobs and that workers on federally funded projects across the country are paid fair wages and benefits,” said Principal Deputy Wage and Hour Administrator Jessica Looman. “Recent investments in our nation’s infrastructure offer us a great opportunity to educate employers so they can compete for new federal contract opportunities and put skilled employees to work in their communities.”
While seminar attendance is free, registration is required. Additional information, including the links to pre-recorded video trainings and virtual Q&A sessions, will be provided to participants after registration.
Most of the Construction Gains Occurred in the Residential Construction Sector While Firms Now Pay Workers 19 Percent More Compared to the Average Job as they Struggle to Recruit New People
The construction sector added 15,000 jobs in April while the sector’s unemployment rate fell to a record low for the month and the number of unfilled construction positions is close to a monthly high, according to an analysis of new government data the Associated General Contractors of America released today. Association officials said the industry likely would have added even more positions if contractors could find more qualified workers.
“Contractors can’t find, reach, hire and train workers fast enough to keep pace with demand,” said Stephen E. Sandherr, the association’s chief executive officer. “The pool of qualified, available labor is the smallest the industry has ever seen for the month of April.”
Construction employment in April totaled 7,903,000, seasonally adjusted, an addition of 15,000 or 0.2 percent from the month prior. Nonresidential construction firms—nonresidential building and specialty trade contractors along with heavy and civil engineering construction firms—added only 800 employees in April. Meanwhile, employment at residential building and specialty trade contractors grew by 14,200 or 0.4 percent.
The unemployment rate among jobseekers with construction experienced declined from 4.6 percent in April 2022 to 4.1 percent, the lowest April rate in the 23-year history of the data. A separate government report released earlier this week reported that job openings in construction at the end of March totaled 355,000, just shy of the all-time high for March of 359,000.
Average hourly earnings for production and nonsupervisory employees in construction—covering most onsite craft workers as well as many office workers—jumped by 6.7 percent over the year to $33.94 per hour. Construction firms in April provided a wage “premium” of nearly 19 percent compared to the average hourly earnings for all private-sector production employees.
Association officials noted that the industry is struggling to recruit workers at a time when the federal government spends five dollars to encourage students to go to college and worker in service sector professions for every dollar it invests in career and technical education. They urged public officials to boost funding for construction education and training, and to explore short-term measures, like immigration reform, to address severe labor shortages.
“Federal officials are making massive investments in infrastructure even while their funding policies actively discourage most future workers from considering careers in construction,” Sandherr said. “They don’t seem to want our citizens to work in construction even while they block people from other countries from lawfully entering the profession.”
