August 2023 Compliance News Article

Transitional Relief for Catch-Up Contributions

In response to feedback that the Roth catch-up rule included in the SECURE 2.0 Act of 2022 (SECURE 2.0) will be difficult to implement when it takes effect in 2024, the IRS has issued Notice 2023-62 (the Notice), which provides for an “administrative transition period.” In the same notice, the IRS has also issued clarification on a few technical issues from SECURE 2.0 and is seeking additional comments related to catch-up contributions.

Background

Retirement plans may allow participants who are age 50 or older to defer catch up contributions that exceed the normal deferral limit allowed for retirement plans. For 2023, the normal deferral limit is $22,500 and the catch-up limit is $7,500. Under SECURE 2.0, effective January 1, 2024, catch-up contributions made by employees with wages in excess of $145,000 for the prior year must be made on a Roth basis for plans qualified under sections 401(a), 401(k), 403(b), and 457(b).

Transitional Relief

The Notice allows for a two-year administrative transition period. As a result, during the 2024 and 2025 tax years, catch up contributions made by individuals who will be turning 50 years old or older and with wages in excess of $145,000 will be automatically satisfying the new rule, even if they’re not made on a Roth basis or if the plan does not allow for Roth contributions.

Additional Clarification

There is an interpretation of SECURE 2.0 that prohibits all catch-up contributions for 401(k) and 403(b) plans; however, the Notice confirms that Congress’s intent was not to remove the availability of catch-up contributions.
There is also an interpretation of SECURE 2.0 that requires all employees participating in a governmental 457(b) plan to make catch-up contributions on a Roth basis, regardless of their wages. The Notice appears to correct this; however, additional guidance may be needed.
The Notice confirms that SECURE 2.0 did not change prior law and employees who contribute to two or more unrelated plans must aggregate their contributions across all plans to determine whether they have met the individual deferral limit.

Public Comments

Guidance clarifying that individuals who are self-employed or have no FICA wages are not subject to the $145,000 Roth threshold.
The plan administrator would be permitted to treat a participant election to make catch-up contributions on a pre-tax basis as an election to make Roth catch-up if the participant is required to make catch-up contributions on a Roth basis.
Retirement plans maintained by more than one employer (including a multiemployer plan), may treat each participating employer separately regarding the $145,000 FICA wages. In other words, if a participant under two participating plans earned less than $145,000 FICA wages in each plan, then the Roth catch-up is not required even if the total FICA wages aggregated under all plans exceed $145,000. Also, if a participant earned more than $145,000 under one plan, but not under another, the participant is only required to make Roth catch-up under the plan where they earned greater than $145,000.

Comments can be submitted on or before October 24, 2023, using one of the following methods:

Federal eRulemaking Portal at www.regulations.gov
By mail to: Internal Revenue Service, Attn: CC:PA:LPD:PR (Notice 2023-62), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044

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