On August 25, 2023, the IRS issued Notice 2023-62 (“Notice”), which provides guidance regarding the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act (“Act”). Significantly, the Notice provides plans with an additional two years to implement the Act’s requirement to treat certain catch-up contributions as after-tax Roth contributions, and also signals that further guidance may be forthcoming on the treatment of catch-up contributions. IRS has advised that it welcomes comments on the Notice and the catch-up contribution requirements under the Act.
As discussed in our Benefits Update dated January 19, 2023, the Act provides that all catch-up contributions (additional contributions permitted for participants aged 50 or older) made to a 401(k), 403(b) or 457(b) governmental retirement plan by an employee whose prior year wages exceed $145,000, as adjusted annually, must be made as after-tax Roth contributions starting in 2024. This requirement raised administrative concerns, particularly among multiemployer plans, who pointed out that they may have difficulty obtaining needed compensation information from employers or tracking compensation paid to a participant across multiple employers under the same plan.
Administrative Transition Period
In response to the concerns raised by affected plans, the Notice grants an additional two years to implement the Act’s provisions regarding catch-up contributions, delaying the required date of implementation from 2024 to 2026. Therefore, participants whose prior year wages exceed $145,000 may continue to make catch-up contributions on a pre-tax basis through the plan year starting in 2025 without a requirement to treat such contributions as Roth contributions, and plans with participants whose prior year wages exceed $145,000 are not required to treat those participants’ catch-up contributions as Roth contributions.
Additional Clarifications and Preview of Anticipated Guidance
The Notice addresses confusion over an apparent drafting error in the Act that could be read to eliminate catch-up contributions altogether. The Notice clarifies that eligible participants over age 50 may continue to make catch-up contributions, regardless of income.
The Notice also outlines guidance that the IRS intends to issue regarding catch-up contributions, including the following.
- Participants who did not receive any wages from the employer sponsoring the plan in the prior year are not required to make their contributions on a Roth basis in the current year.
- If a participant whose prior year wages exceeds $145,000 from the employer sponsoring the plan elects to make catch-up contributions on a pre-tax basis, the plan sponsor may treat that as an election to make such catch-up contributions on a Roth basis.
- For plans sponsored by more than one employer, including a multiemployer plan, in determining whether a participant earned wages in excess of the Roth threshold in the prior year, the plan and each employer may separately consider amounts earned from each employer, and are not required to aggregate compensation from all participating employers. This would also mean that a participant whose compensation from one employer exceeds the Roth threshold could still make pre-tax catch-up contributions from their compensation paid by another participating employer that remains below the threshold.
Written comments regarding the Notice must be submitted to the IRS on or before October 24, 2023. Please contact Slevin & Hart for more information about how the Notice may affect your plan.
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