IRS Delays SECURE 2.0 Roth Catch-Up Contribution Rule
The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act, which was enacted in December 2022, is a game-changer in the world of retirement savings. With ninety-two new provisions, this sweeping new law aims to promote savings, offer more flexibility to those saving for retirement and incentivize businesses to support their employees’ retirement goals. Among other things, the SECURE 2.0 Act made significant changes to catch-up contributions, affecting both employers and employees.
With the new catch-up provisions scheduled to kick in after 2023, many retirement plan sponsors have been struggling to implement the necessary processes and procedures to comply. Fortunately, the IRS recently provided some relief in Notice 2023-62, which provided a two-year transition period as discussed below. In addition to extending the deadline, the new guidance corrects a technical error in the SECURE 2.0 Act that had caused confusion among taxpayers and their advisors regarding the continued availability of catch-up contributions for employees.
SECURE 2.0 New Requirements
Individuals aged 50 or older are allowed to make catch-up contributions to their 401(k) plans and similar retirement accounts as permitted by the tax law. The permissible amount is adjusted annually to account for inflation. For 2023, you can contribute an additional $7,500 over the current annual limit of $22,500 for 401(k) contributions, regardless of your income level.
Under the existing rules, all eligible taxpayers can choose to make their contributions on a pre-tax or a Roth after-tax basis, provided that the employer allows the Roth option. However, Section 603 of the SECURE 2.0 Act mandates that any catch-up contributions made by higher-income participants (individuals whose Social Security wages from the previous year exceeded $145,000) to 401(k), 403(b) or 457(b) retirement plans must be designated as after-tax Roth contributions. Additionally, any plan that allows higher-income participants to make such catch-up contributions must also allow other participants aged 50 or older to make their catch-up contributions on an after-tax Roth basis. The law specified that these requirements are effective for tax years beginning after December 31, 2023.
This effective date for implementing the new requirements caused concern among plan sponsors and payroll providers due to several administrative challenges. One of the biggest hurdles is identifying higher-income participants for plan administrators. This is because they generally haven’t had the need to calculate employees’ Social Security wages before. In addition, sponsors must implement procedures to restrict catch-up contributions to Roth contributions and communicate these changes to their employees.
Employers who do not offer Roth contribution features in their traditional retirement plans face an even greater challenge. They can choose to amend their plans to allow Roth contributions, which can take months to process and implement, or they can eliminate the ability to make catch-up contributions for all employees.
New IRS Guidance
The IRS recently released Notice 2023-62 to address the concerns regarding the original effective date for the new requirements. The Notice created an “administrative transition period” which extends the effective date to January 1, 2026. This means that employers can allow catch-up contributions that are not designated as Roth contributions after December 31, 2023, and until January 1, 2026, without violating the SECURE 2.0 Act. Additionally, plans without Roth features may allow catch-up contributions during this period.
The guidance also corrected a drafting error in the SECURE 2.0 Act that created confusion about whether the law eliminated the ability of taxpayers to make catch-up contributions after 2023. The IRS clarified that plan participants aged 50 or older can continue to make catch-up contributions in 2024 and beyond.
Potential Future Guidance
The IRS also used Notice 2023-62 to provide a glimpse of some additional guidance regarding Section 603 that’s “under consideration.” After taking into account any comments received, the IRS stated it is considering releasing additional guidance in the future concerning multi-employer plans and other out-of-the-ordinary situations.
The IRS’s extension of the effective date provides helpful breathing room to plan sponsors and related parties with respect to the implementation of the key aspects of Section 603. As noted, though, the requisite changes to achieve compliance will take some time and effort to put into place. Plan sponsors would be wise to start sooner rather than later. It is also equally important for employers to be aware of other mandatory provisions in the SECURE 2.0 Act that must be in operational compliance from the applicable effective dates to maintain tax-qualified status. As future guidance is released, plan sponsors should work with their advisers to understand what changes, required and optional, are needed as a result. If you have any questions, please contact our firm.
Contributing author: Joseph Chemotti, CPA, CCIFP, is an audit partner at Dannible & McKee, LLP. Joe has over 33 years of experience providing auditing, accounting and consulting services to a wide range of privately-held companies. Dannible & McKee is a member of the American Institute of Certified Public Accountants Employee Benefit Audit Quality Center, where Joe is the designated audit partner. He is responsible for the quality of the firm’s ERISA employee benefit plan audit practice. For more information on this topic, you may contact Joe at firstname.lastname@example.org or (315) 472-9127.