IRS announces transition relief for Roth catch-up contribution requirement

In Notice 2023-62, the IRS has provided much-anticipated relief and preliminary guidance on the requirement in section 603 of the recent SECURE 2.0 Act that catch-up contributions made by participants with prior-year FICA wages in excess of $145,000 in 401(k), 403(b) and governmental 457(b) plans must be designated as after-tax Roth contributions, starting in 2024.

The IRS also confirmed that all eligible plan participants can continue making catch-up contributions after 2023. There had been a concern that catch-up contributions wouldn’t be allowed for any participants, because the SECURE 2.0 Act had unintentionally deleted a provision in the Internal Revenue Code that was thought to be necessary to allow catch-up contributions; however, the IRS confirmed that catch-up contributions will remain available.

Scope of relief

The notice effectively delayed the January 1, 2024 compliance deadline until 2026 by providing a two-year “administrative transition period,” during which employees age 50 and over can still make pre-tax catch-up contributions regardless of income through 2025. In addition, a plan will be treated as satisfying section 603 during the transition period even if the plan does not allow Roth contributions.

The relief was provided in response to widespread industry concerns that plan sponsors were not provided enough time to transition to the new rule, which will require guidance from the IRS on a number of interpretive questions and updates to payroll and recordkeeper systems.

Preliminary guidance

While the IRS plans to issue comprehensive guidance relating to the section 603 requirement in the future, the notice includes a preview of some of the guidance that the IRS intends to issue. The IRS could make changes to the guidance, including as a result of comments received, though we would expect any such changes would apply prospectively:

• Section 603 will not apply to eligible participants who do not have FICA wages. As a result, partners, other self-employed individuals, or state or local government employees whose employment is exempt from FICA tax under the tax code, regardless of their income during the prior year, will not be required to meet the Roth catch-up contribution requirement.
• A plan may treat a catch-up contribution election made on a pre-tax basis as an election to make the catch-up contribution as a designated Roth contribution. This guidance will be helpful for plans that do not require participants to make a separate catch-up contribution election.
• If a plan is maintained by more than one employer (including a multiemployer plan):
  • When determining whether a participant’s wages are more than $145,000 in the prior year, the wages a participant receives from one participating employer will not be aggregated with the wages received from another participating employer.
  • If a participant’s wages are more than $145,000 from a participating employer during the prior year, catch-up contributions made by the participant while employed by another participating employer will not be required to be made as designated Roth contributions.

Going forward

Comments and suggestions on the topics covered in the notice are due by October 24, 2023. The notice specifically asks for comments on whether future guidance should allow a plan that does not offer Roth contributions to prohibit participants with prior-year FICA wages greater than $145,000 from making catch-up contributions while allowing other participants to make pre-tax catch-up contributions.

In the meantime, the relief provided by the notice should be very helpful to plan sponsors by providing additional time to identify any administrative challenges with implementing section 603 and to develop solutions to address these issues.

Authors

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David Amendola

Senior Director, Benefits Advisory and Compliance

email Email phone +1 203 219 4594

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Gary Chase

Director, Retirement and Executive Compensation

email Email phone +1 212 309 3802

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William “Bill” Kalten

Senior Director, Retirement and Executive Compensation

email Email phone +1 203 326 4625

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