On August 25, 2023, in response to concerns regarding the timely implementation of SECURE 2.0’s Roth catch-up contribution requirement, the IRS issued Notice 2023-62, which provides that 401(k), 403(b) and 457(b) plans now have until December 31, 2025 to comply.
SECURE 2.0 Roth Catch-Up Contribution Requirement
Section 603 of SECURE 2.0 amended section 414(v) of the Internal Revenue Code by adding section 414(v)(7), which requires that for plan years beginning after December 31, 2023, catch-up contributions made by employees whose prior-year compensation exceeds $145,000 (“eligible participants”) must be made as Roth contributions and are subject to Roth rules. This Roth treatment of catch-up contributions is mandatory for any plan that makes catch-up contributions available.
In response to this new requirement, many plan sponsors, recordkeepers and payroll providers raised concerns that the administrative tasks required to implement this change could not be completed by December 31, 2023. On July 14, 2023, approximately 200 organizations signed a letter written by the American Benefits Council to the House Ways & Means Committee requesting a delay of the implementation of Section 414(v)(7).
Notice 2023-62 Administrative Transition Period
In response, the IRS and Treasury Department through Notice 2023-62 have designated the first two taxable years beginning after December 31, 2023 as an administrative transition period with respect to the Roth catch-up contribution requirement. This means that catch-up contributions can continue to be made on a pre-tax basis until December 31, 2025, giving plan sponsors additional time to implement any administrative changes necessary to comply.
In addition, Notice 2023-62 addresses the technical error that would have eliminated all catch-up contributions beginning in 2024. Under the notice, catch-up contributions can continue to be made after 2023.
Additional Guidance on the Roth Catch-up Contribution Requirement Forthcoming
In addition to the transition period, the Treasury Department and IRS indicated that they intend to issue further guidance to assist with implementation of Section 603 of SECURE 2.0, which, as noted in Notice 2023-62, is expected to include the following:
- Roth treatment of catch-up contributions is not required for participants who have not received FICA wages in the preceding year from the employer sponsoring the plan;
- Plan sponsors may treat an eligible participant’s election to make catch-up contributions on a pre-tax basis as an election to designate catch-up contributions as Roth contributions;
- Where a plan is maintained by more than one employer and an eligible participant receives wages from more than one participating employer in the preceding year, (1) the participant’s wages from one participating employer are not aggregated with wages received from another participating employer for purposes of determining whether the participant’s wages exceed $145,000, and (2) where the participant’s wages from one participating employer in the plan for the preceding calendar year exceed $145,000, elective deferrals made on behalf of the participant by another participating employer that are catch-up contributions would not be required to be designated as Roth contributions unless the participant’s wages for the preceding calendar year from that other employer also exceed $145,000.
Plan sponsors now have additional time to determine the best way to implement this new requirement effectively and efficiently and should continue to work with their plans’ service providers to make sure these changes are timely implemented.
The IRS and Treasury Department have solicited further comments and suggestions concerning this notice and any other aspects of section 603 of SECURE 2.0. Comments must be submitted in writing on or before October 24, 2023. Plan sponsors and administrators may submit additional comments and suggestions as they continue to consider how best to implement this change.