Agency announces two-year reprieve for employers; comments for further guidance due Oct. 24

On Friday, Aug. 25, 2023, the IRS announced a two-year reprieve for employers on the implementation of SECURE 2.0's[1] requirement that catch-up contributions made by higher-income participants be designated as after-tax Roth contributions. The much-anticipated (and hoped for) administrative transition period delays the effective date of this requirement to Jan. 1, 2026. IRS Notice 2023-62 (the "Notice") also clarifies that participants age 50 and over can continue to make catch‑up contributions after 2023, despite an inadvertent deletion in SECURE 2.0, and confirms certain aspects regarding implementation of designated Roth contributions.

As described in our prior blog post, Section 603 of SECURE 2.0 mandated that, for tax years beginning after Dec. 31, 2023, catch-up contributions made to 401(k), 403(b) and governmental 457(b) plans by employees whose FICA wages in the prior year exceeded $145,000 (as adjusted in future years) must be made as Roth contributions. This requirement is a change to the current rules which allow a participant to designate whether their catch-up contributions are made on a pre-tax or an after-tax Roth basis.

The short timeframe from the passage of SECURE 2.0 on Dec. 29, 2022, to the effective date of the designated Roth requirement plus the lack of helpful guidance resulted in much concern and frustration among plan sponsors and third-party administrators. So much so that 200+ organizations wrote to Congress members, the Department of Treasury, and the Internal Revenue Service requesting transition relief for a more orderly implementation of the requirement, as well as clarification that the elimination of the Internal Revenue Code ("Code") section permitting catch-up contributions was inadvertent.

The Notice provides a welcome reprieve to plan sponsors and administrators alike. Significantly, the Notice:

• Clarifies that SECURE 2.0 does not prohibit plans from permitting catch-up contributions. The Notice confirms the elimination of Code Section 402(g)(1)(C) in SECURE 2.0 was unintentional. Therefore, plans permitting an eligible participant to make catch-up contributions may continue to do so after Dec. 31, 2023, without jeopardizing their qualified status.
• Confirms that deferrals made to more than one plan continue to be aggregated. Elective deferrals continue to be aggregated for purposes of determining whether the amount of the individual's elective deferrals exceeds the applicable dollar amount under Code Section 402(g)(1)(B) and for purposes of applying the limitation on the amount of catch-up contributions under Code Section 414(v)(2).
• Confirms that plans may not limit designated Roth catch-up contributions to higher-income participants. If a plan provides that an eligible participant who is subject to the requirements of new Code Section 414(v)(7)(A) may make catch-up contributions as designated Roth contributions, then all eligible participants in the plan must be permitted to make catch-up contributions as designated Roth contributions.
• Announces a 2-year administrative transition period. To facilitate an orderly transition, until taxable years beginning after Dec. 31, 2025: (1) all catch-up contributions will be treated as satisfying the requirements of Code Section 414(v)(7)(A), even if the contributions are not designated as Roth contributions; and (2) a plan that does not provide for designated Roth contributions will be treated as satisfying the requirements of Code Section 414(v)(7)(B).
• Confirms there is more guidance to come. After taking into account any comments received, the IRS expects to issue further guidance addressing: (1) eligible participants who do not have FICA wages in the prior year (e.g., self-employed individuals and partners); (2) in the case of an eligible participant subject to Code Section 414(v)(7)(A), the ability of employers to designate pre-tax catch-up elections as designated Roth contributions; and (3) for purposes of determining whether an eligible participant has FICA wages exceeding $145,000, FICA wages from other employers may be disregarded.

The IRS has requested written comments regarding the Notice and any other aspect of Section 603 of SECURE 2.0 by Oct. 24, 2023. The request specifically asks for comments regarding whether IRS guidance should address a plan that permits eligible participants to make catch-up contributions under Code Section 414(v) but does not include a qualified Roth contribution program. In particular, should plans be permitted to prohibit higher-income participants from making catch-up contributions, while allowing others to make pre-tax catch-up contributions or should Code Section 414(v)(4) continue to require plans to allow all eligible participants to make the same catch-up contribution election?

Now plan sponsors have 2+ years to be more thoughtful and deliberate in determining whether to add a Roth contribution feature to their retirement plan (if it does not contain one already) and in implementing the requirement that high earners' catch-up contributions be made on an after-tax Roth basis.

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