The SECURE Act 2.0, enacted on December 29, 2022, is the most significant piece of legislation affecting retirement plans in many years. See our summaries here and here.
One provision in the Act causing headaches for plan sponsors, payroll providers and recordkeepers requires catch-up contributions to be made as Roth contributions for participants who earned more than $145,000 in the prior year. Participants who earned less than $145,000 in the prior year may still make catch-up contributions on a pre-tax basis.
As background:
The Roth catch-up change means that plans without a Roth option must either add Roth for all participants generally (not just for catch-ups) or remove the ability for participants to make catch-up contributions. With a January 1, 2024, deadline looming, many key questions remain unanswered and thorny administrative challenges have not been resolved.
IRS to the Rescue – For Now
In Notice 2023-62, the IRS announced a two-year “Administrative Transition Period” through the end of 2025, during which a plan may operate without implementing the Roth catch-up mandate. This means that, until 2026:
In addition, despite much public discussion about whether the Act inadvertently eliminated catch-ups entirely, requiring Congressional action to reinstate, the IRS concluded that current Internal Revenue Code provisions continue to allow catch-ups.
IRS Previews Guidance on Some Open Questions
The Notice also offered insights on the IRS’ current views on some open questions, which the IRS intends to address in future guidance, subject to comments, including:
Some employers have considered whether they could require all catch-up contributions to be made as Roth contributions. Our view is this is not currently an option, because Roth requires the ability to make an election between pre-tax and Roth. The Act’s Roth catch-up rule is an exception to that requirement.
What to Do Now
If you have not taken any action yet to comply with the Roth catch-up mandate, no action is needed now. However, if you have already amended your plan to:
If you need another plan amendment, you must adopt it before your original amendment would have become effective, i.e., before 2024. Your recordkeeper may require a signed amendment by an even earlier deadline to timely implement changes for 2024.
For questions about this change or any other employee benefits matter, please contact a member of our Employee Benefits Practice Group.