On Friday, the U.S. Internal Revenue Service (IRS) issued Notice 2023-62, which contains a first bite of eagerly awaited guidance regarding catch-up contribution changes under the SECURE 2.0 Act of 2022 (SECURE 2.0).
Two-Year Administrative Transition Period for New Roth Catch-Up Requirements. The notice announced a two-year administrative transition period with respect to new Roth catch-up contribution requirements for certain higher-income participants in 401(k) plans. The new rules apply to participants in a 401(k) plan whose FICA wages for the preceding calendar year from the employer sponsoring the plan exceeded $145,000 (as adjusted for cost-of-living increases). Under the new rules, such higher-income participants are permitted to make catch-up contributions only if such contributions are made on an after-tax Roth basis pursuant to their election. A 401(k) plan that permits a higher-income participant to make catch-up contributions to the plan under the new rules must also permit any other catch-up eligible participant to make catch-up contributions on an after-tax Roth basis. The notice effectively provides that plans may continue to be operated in accordance with pre-SECURE 2.0 catch-up rules and will be treated as satisfying the new rules until taxable years beginning after December 31, 2025.
Catch-Up Contributions Permitted After 2023. The notice also confirms that plan participants who are age 50 and over will continue to be permitted to make catch-up contributions after 2023 and that all catch-up contributions made by an eligible participant, including to plans of unrelated employers, will be aggregated for purposes of applicable statutory limits. Members of the retirement community had been concerned that a conforming change in SECURE 2.0 could be read to disallow catch-up contributions entirely beginning in 2024. In May, the chairs and ranking members of the House Committee on Ways and Means and the Senate Committee on Finance sent a letter to the Secretary of the Treasury and the IRS Commissioner making clear that Congress “did not intend to disallow catch-up contributions nor to modify how the catch-up contribution rules apply to employees who participate in plans of unrelated employers.” In the absence of a technical correction from Congress, the notice provides certainty regarding the status of catch-up contributions in 2024.
Additional Guidance Under Consideration. Finally, the notice makes clear that the Treasury Department and the IRS anticipate issuing more guidance regarding SECURE 2.0’s new Roth catch-up contribution requirements, including to
- clarify that the rules do not apply in the case of an eligible participant who does not have FICA wages (such as a partner or other self-employed individual)
- permit a plan to treat an election by a higher-income participant to make pretax catch-up contributions as an election by such participant to make catch-up contributions on an after-tax Roth basis
- provide that in the case of a plan maintained by more than one employer (including a multiemployer plan), each participating employer will determine its higher-income participants to whom the new rules apply without regard to each other participating employer
The notice requests comments on the anticipated guidance and on whether such guidance should address the permissibility of a plan design that disallows catch-up contributions by higher-income participants while permitting other catch-up eligible participants to make catch-up contributions on a pretax basis.
Plan sponsors should continue working with recordkeepers and payroll providers to prepare for the implementation of the new Roth catch-up contribution rules. Please contact a member of our team if you would like to discuss the changes or if you would like assistance in preparing comments to the Treasury Department and IRS regarding the rules.
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