The SECURE Act 2.0, enacted on December 29, 2022, is the most significant piece of legislation affecting retirement plans in many years. See our summaries here and here.
One provision in the Act causing headaches for plan sponsors, payroll providers and recordkeepers requires catch-up contributions to be made as Roth contributions for participants who earned more than $145,000 in the prior year. Participants who earned less than $145,000 in the prior year may still make catch-up contributions on a pre-tax basis.
As background:
- Catch-up contributions are participant elective deferrals made by participants in 401(k), 403(b) or 457(b) plans who are age 50 or older that exceed plan and legal limits, such as the 2023 $22,500 deferral limit. The catch-up contribution limit is $7,500 in 2023. Higher limits will apply to participants aged 60-63 under a different SECURE Act 2.0 provision.
- Roth contributions are participant elective deferrals made on an after-tax basis. Those contributions and their earnings are not taxed when distributed if certain requirements are met.
The Roth catch-up change means that plans without a Roth option must either add Roth for all participants generally (not just for catch-ups) or remove the ability for participants to make catch-up contributions. With a January 1, 2024, deadline looming, many key questions remain unanswered and thorny administrative challenges have not been resolved.
IRS to the Rescue – For Now
In Notice 2023-62, the IRS announced a two-year “Administrative Transition Period” through the end of 2025, during which a plan may operate without implementing the Roth catch-up mandate. This means that, until 2026:
- All participants may continue to make pre-tax catch-up contributions.
- Plans without a Roth option may continue to allow catch-up contributions without adding Roth.
In addition, despite much public discussion about whether the Act inadvertently eliminated catch-ups entirely, requiring Congressional action to reinstate, the IRS concluded that current Internal Revenue Code provisions continue to allow catch-ups.
IRS Previews Guidance on Some Open Questions
The Notice also offered insights on the IRS’ current views on some open questions, which the IRS intends to address in future guidance, subject to comments, including:
- Because the $145,000 compensation threshold is based on prior year FICA wages, the rule would not apply to partners or other self-employed individuals, or state and local employees, who do not have FICA wages.
- For participants subject to the rule, plans may treat an election to make pre-tax catch-up contributions as an election to make Roth catch-up contributions, so a separate Roth designation would not be required.
- For a plan maintained by more than one employer (for example, a multiple employer plan), W-2 wages from unrelated employers would not be aggregated for purposes of determining whether the $145,000 threshold has been met.
- The IRS is requesting feedback on whether a plan that does not offer Roth contributions can comply by prohibiting catch-up contributions for those making over $145,000.
Some employers have considered whether they could require all catch-up contributions to be made as Roth contributions. Our view is this is not currently an option, because Roth requires the ability to make an election between pre-tax and Roth. The Act’s Roth catch-up rule is an exception to that requirement.
What to Do Now
If you have not taken any action yet to comply with the Roth catch-up mandate, no action is needed now. However, if you have already amended your plan to:
- Allow Roth contributions for 2024, you can either wait until 2026 or go ahead and implement Roth as an option effective January 1, 2024. If you decide to wait until 2026, you must remove the Roth option via another plan amendment.
- Eliminate catch-up contributions beginning in 2024, you can rescind that amendment with another plan amendment.
If you need another plan amendment, you must adopt it before your original amendment would have become effective, i.e., before 2024. Your recordkeeper may require a signed amendment by an even earlier deadline to timely implement changes for 2024.
For questions about this change or any other employee benefits matter, please contact a member of our Employee Benefits Practice Group.