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Ask the Experts August 15, 2023
How Is Compensation Defined When Considering SECURE 2.0 Catch-Up Rules?
Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.
Reported by PS
Q: I understand that, thanks to the SECURE 2.0 Act, anyone earning more than $145,000 who wishes to make catch-up contributions will be forced to elect Roth for such contributions, beginning in 2024. What is the definition of compensation for this purpose? Is it wages as reported in Box 5 of Form W-2?
Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:
A: Your understanding is generally correct, as the applicable provision of the SECURE 2.0 Act, Section 603, defines compensation as Internal Revenue Code Section 3121(a) wages earned during the preceding calendar year for the employer sponsoring the plan, which may be different than the Plan’s definition of compensation (e.g., for contribution purposes). Thus, to determine the over-$145,000 group for 2024, you would need to look to each employee’s Form W-2 wages for 2023 (generally Box 3 or 5, depending on whether the employee has tips).
It should be noted that self-employed individuals (including self-employed clergy) and partners, who do not have W-2 wages related to such employment, would seemingly be able to continue to make traditional pretax catch-up contributions, even if their income from self-employment is over $145,000. However, it is possible that this loophole could be closed via further Congressional action.
And finally, the future of catch-up contributions in general was questioned by some erroneous language in the SECURE 2.0 Act. Though we expect this potential error to be corrected or clarified by Congress (or through future guidance), you should check PLANSPONSOR periodically for future developments in this regard.
NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.
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