Changes to Retirement Plan Catch-Up Contributions are Delayed

By Drew Cheney September 8, 2023

The Internal Revenue Service recently issued Notice 2023-62, which provided a welcome extension of the effective date of a key provision of SECURE 2.0. The Notice also provided some insight in the IRS’s views on some of the provision’s ambiguities and open questions. This brief article will summarize the Notice.

Background

SECURE 2.0 is a major piece of legislation that was enacted in December 2022. It contains many provisions, the majority of which deal with qualified retirement plans. We previously wrote about this legislation here.

Participants in 401(k) and 403(b) plans are generally subject to a limit on the amount of their elective deferrals. For 2023, the basic limit is $22,500; this amount is indexed for inflation. Additionally, under Code Section 414(v), plan participants who have reached age 50 are entitled to make “catch-up” contributions beyond the basic limit. For 2023, the maximum catch-up contribution for most participants is $7,500; this amount is also indexed for inflation. In addition, SECURE 2.0 allows participants between the ages of 62 and 64 to make larger catch-up contributions.

Section 603 of SECURE 2.0 amends Code Section 414(v) by requiring that plan participants who had wages of more than $145,000 (indexed for inflation) in the preceding year must make their catch-up contributions in the form of Roth contributions. (Unlike traditional retirement plans, Roth contributions do not generate a tax deduction for the participant, and their subsequent withdrawals during retirement do not constitute taxable income.) This provision was scheduled to go into effect for tax years beginning in 2024, which for most plans meant that the changes would need to be implemented starting in January 2024.

Many payroll and plan service providers and many employers were very concerned that it would not be practically possible to update their systems by January 2024 to accommodate the payroll challenges and the anticipated large increase in the number of Roth accounts within plans.

Summary of Notice 2023-62

The Notice announced a two-year “administrative transition period” that delays the effective date of the Roth requirement until the first tax year beginning after December 31, 2025.

In addition, the Notice states that the IRS intends to issue guidance that is expected to state that:

• The Roth requirement only applies to participants who had wages as an employee of more than $145,000 (as indexed for inflation) in the preceding year. Thus, for example, the provision would be inapplicable to an individual such as a partner in a partnership who received self-employment income rather than wages in the preceding year.
• In the case of plans maintained by more than one employer, wages in the preceding year from more than one employer are not aggregated for purposes of determining whether an employee had wages of more than $145,000 in the preceding year.
• An election by an affected employee to make a pre-tax catch-up contribution can be treated by the employer as an election to make catch-up contributions on a Roth basis. No separate election must be made by the employee.

For more information, please contact Drew Cheney or your BNN tax advisor at 800.244.7444.