Summary: On August 25, 2023, the Internal Revenue Service (IRS) issued anticipated, and welcome, transition relief for retirement plan sponsors regarding the SECURE 2.0 requirement to designate catch-up contributions on a Roth (or after-tax) basis for certain high-earning participants. IRS Notice 2023-62 (“Notice”) provides a two-year administrative transition period that delays this requirement and allows participants, regardless of income, to continue making catch-up contributions on a pre-tax basis until December 31, 2025. This SECURE 2.0 Roth catch-up requirement was initially scheduled to go into effect on January 1, 2024.
As we previously reported in a broader article on the SECURE 2.0 Act, one provision in particular within SECURE 2.0 requires catch-up contributions to be made on a Roth (or after-tax) basis, except for participants with prior-year wages of $145,000 or less. This means that if participants with wages over $145,000 in the prior calendar year for Federal Insurance Contributions Act (FICA) purposes want to make catch-up contributions, such catch-up contributions must be made on a Roth (or after-tax) basis. The effective date of this requirement applies to taxable years beginning after December 31, 2023.
The practical issues presented with this Roth catch-up requirement under SECURE 2.0 include:
Catch-Up contributions permit age 50 or over participants to contribute elective deferrals to their 401(k), 403(b), or 457(b) plans that exceed applicable plan limits.
Catch-up contribution provisions under the Internal Revenue Code were first introduced in 2002 under the Economic Growth and Tax Reconciliation Act.
For 2023, the annual limit on elective deferral contributions is $22,500 and the limit for catch-up contributions is $7,500.
The Notice was released in the wake of taxpayer concerns around meeting this compliance requirement by the January 1, 2024 deadline. These concerns included a letter signed by a host of employers and other retirement plan stakeholders urging Congress to delay the effective date of this SECURE 2.0 Roth catch-up rule provision.
This administrative transition period is intended to facilitate an orderly transition for compliance with that requirement” according to the Notice.
Specifically, the Notice provides a two-year administrative transition period, permitting the following through December 31, 2025:
Essentially, this Notice provides much-needed relief and breathing room for plan sponsors and their plan service providers by delaying this Roth catch-up requirement from 2024 to 2026, rather than have plan sponsors and service providers scramble to update and coordinate payroll and plan recordkeeping systems as well as adopt required amendments prior to January 1, 2024.
The Notice also clarifies that SECURE 2.0 does not prohibit plans from permitting catch-up contributions, so age 50 and over participants can still make catch-up contributions after 2023. This clarification addresses a drafting issue in SECURE 2.0 that could have effectively eliminated catch-up contributions from the Internal Revenue Code.
Finally, the Notice states the IRS intends to issue future guidance regarding the Roth catch-up requirement and:
Employers sponsoring retirement plans that are impacted by this SECURE 2.0 Roth catch-up rule should be aware of this transition relief and begin now to gear up their administrative and system processes for implementation of the Roth catch-up contribution requirement for the 2026 plan year.
Employers are also advised to continue working with their plan service providers on compliance efforts in anticipation of the extended January 1, 2026 deadline.
Risk Strategies will continue to follow developments regarding SECURE 2.0 and provide updates when available. Contact us directly with any questions at benefits@risk-strategies.com.