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IRS Issues Delay for SECURE 2.0 Roth Catch-Up Contributions
Practical Law Legal Update w-040-5521 (Approx. 4 pages)
IRS Issues Delay for SECURE 2.0 Roth Catch-Up Contributions
by Practical Law Employee Benefits & Executive Compensation
| Law stated as of 28 Aug 2023 • USA (National/Federal) |
The Internal Revenue Service (IRS) has issued Notice 2023-62, which delays implementation of the Roth catch-up requirement for certain highly paid participants under SECURE 2.0.
On August 25, 2023, the Internal Revenue Service (IRS) issued Notice 2023-62, which provides temporary relief from the SECURE 2.0 requirement that certain catch-up contributions be designated as Roth contributions.
Background
Under SECURE 2.0, a plan participant age 50 or older whose wages in the prior calendar year exceeded $145,000 must make any catch-up contributions as Roth contributions, not pre-tax. This change is effective for taxable years beginning after December 31, 2023, and applies to qualified plans under Code section 401(a), 403(b) plans, and governmental 457(b) plans. For more information on SECURE 2.0, see SECURE 2.0 Act Provisions Affecting Retirement Plans Toolkit.
With the January 1 effective date nearing, employers, plan administrators, payroll providers, and recordkeepers have expressed concern over the implementation of the Roth catch-up requirement due to numerous administrative challenges. As a result, the IRS announced an administrative transition period that provides temporary relief for the Roth catch-up designation and clarifies certain other catch-up issues under SECURE 2.0.
IRS Announces Roth Catch-Up Transition Relief
Under Notice 2023-62, the 2024 and 2025 taxable years will be considered an administrative transition period for the requirement that certain catch-up contributions be designated as Roth contributions. Under the relief:
- Catch-up contributions will be treated as satisfying Code Section 414(v)(7)(A) (26 U.S.C. § 414(v)(7)(A)) even if the contributions are not Roth. This means that plans can allow-up catch-up contributions that are not Roth contributions for employees whose wages in the prior calendar year exceeded $145,000.
- A plan that does not provide for designated Roth contributions will be treated as satisfying Code Section 414(v)(7)(A) (26 U.S.C. § 414(v)(7)(A)). This means that plans that do not allow Roth contributions can continue to offer catch-up contributions.
The notice also clarifies that SECURE 2.0 will not prohibit plans from allowing catch-up contributions after 2023. This is in response to a drafting issue in SECURE 2.0 that inadvertently eliminated catch-up contributions from the Code.
In the release, the IRS noted that they intend to issue future guidance clarifying that:
- The Roth catch-up requirement would not apply to participants that do not have FICA wages in the preceding calendar year from the plan sponsor (for example, partners or other self-employed individuals).
- Plan administrators and employers could treat an election by the participant to make pre-tax catch-up contributions as an election to make Roth catch-up contributions.
- For multiemployer plans and other plans maintained by more than one employer, a participant's wages from one participating employer would not be aggregated with wages from another participating employer to determine the $145,000 limit.
The Department of Treasury and IRS invite comments on the release, including how to address plans that allow catch-up contributions but do not include Roth contributions. Comments are due October 24, 2023.
Practical Implications
The two-year transition period for SECURE 2.0's Roth catch-up requirement provides welcome relief for plan sponsors and recordkeepers. Even though the announcement by the IRS that they intend to issue future guidance is not final, it provides some comfort on how future guidance may look. Plan sponsors should watch for future guidance on this and other SECURE 2.0 implementation issues.