On Friday, August 25, 2023, the Internal Revenue Service (IRS) announced a transition period for the implementation of the new Roth “catch-up” contribution requirement of the SECURE 2.0 Act. The delay extends compliance with the requirement for a two-year period, until the first taxable year after December 31, 2025 (i.e., January 1, 2026). The delay, announced in Notice 2023-62, is welcomed by plan sponsors and retirement plan administrators, both of which had expressed serious concerns to the IRS about implementing the requirement by January 1, 2024, the effective date set out in the SECURE 2.0 Act.

Under Internal Revenue Code (Code) Section 414(v), plans may (but are not required to) allow participants in 401(k), 403(b), and governmental 457(b) plans who are age 50 or older to make additional “catch-up” contributions to their plan accounts. These age 50 catch-up contributions may be made regardless of any other limits imposed on elective deferrals under the Code. In 2023, eligible participants may make up to $7,500 in catch-up contributions in addition to the otherwise applicable elective deferral limit of $22,500. These catch-up contributions may be made on a pre-tax basis from an eligible participant’s compensation. They also may be made on a Roth (post-tax) basis if Roth contributions are allowed under the retirement plan.

SECURE 2.0

Section 603 of the SECURE 2.0 Act imposes two new requirements on catch-up contributions. First, effective for taxable years beginning on or after December 31, 2023, eligible participants whose FICA wages in the prior calendar year from the employer sponsoring the plan exceeded $145,000 (indexed for years after 2024) can only make age 50 catch-up contributions on a Roth basis in the current taxable year (Roth Catch-Up Participants). Second, if Roth Catch-Up Participants are allowed to make catch-up contributions, then all other participants in the plan must be given the option also to make catch-up contributions on a Roth basis. 

Two-Year Administrative Transition Period

Both plan sponsors and retirement plan administrators have expressed significant concern over their ability to implement the new Roth catch-up contribution requirements by January 1, 2024. Many plans do not offer Roth contributions at all, and plan sponsors have expressed concern over implementation issues with payroll systems and tracking. Retirement plan vendors will have to update their recordkeeping systems to track participant elections and money sources. Some plan sponsors have considered eliminating catch-up contributions in their plans entirely because of implementation concerns.

In response to these concerns, Notice 2023-62 provides a two-year administrative transition period to facilitate an orderly transition for compliance with the SECURE 2.0 Act requirements. During the administrative transition period:
 

• Roth Catch-Up Participants will not be required to make catch-up contributions on a Roth basis. Roth Catch-Up Participants may continue to make catch-up contributions on a pre-tax basis (to the extent that the plan allows for catch-up contributions at all).
• A plan that does not otherwise provide for Roth contributions is not required to implement Roth contributions during the administrative transition period for any participant.
• All plan participants who are age 50 and over can continue to make catch-up contributions on a pre-tax and/or Roth basis, as permitted by their plan.

The administrative transition period lasts only until taxable years beginning after December 31, 2025. Thus, plans will be required to comply with Section 603 of the SECURE 2.0 Act by January 1, 2026.

Future Guidance

The IRS also stated its intent to issue further guidance, including issues with respect to which plan sponsors have been asking for guidance. These include:

• Guidance that Section 603 will not apply to any participant who does not have Federal Insurance Contributions Act (FICA) wages for the preceding calendar year from the employer sponsoring the plan, including self-employed individuals such as partners, State or local government employees who participate in Social Security replacement plans, and ministers whose income is subject to Self-Employed Contributions Act (SECA).
• Guidance that a plan administrator or employer can deem a Roth Catch-Up Participant’s pre-tax election to instead be a Roth election.
• Guidance for multiple employer and multi-employer plans that would treat wages paid to a participant by one participating employer as separate from wages paid to the same participant by another participating employer for purposes of Section 603.

The IRS also indicated that it is considering a rule that would allow plans to exclude Roth Catch-Up Participants from making catch-up contributions at all, which would mean that the plan would not have to offer a Roth catch-up option to any other plan participants. 

The IRS asked the public for comments on the items addressed in Notice 2023-62 before October 24, 2023.  

Next Steps

Notice 2023-62 is certainly welcome relief for plan sponsors and their vendors. The IRS stated that it intends to issue future guidance on the Roth catch-up requirement, and we will continue to provide updates on this and other SECURE 2.0 issues as additional guidance is announced. 

For more information about how SECURE 2.0 might affect your employee benefit plans, please contact Gary Blachman, Audra Ferguson, Rob Gauss, Lisa Harrison, Lindsay Knowles, Melissa Proffitt, Shalina Schaefer, Kathleen Sheil-Scheidt, Tara Sciscoe, Chris Sears, or the Ice Miller Workplace Solutions attorney with whom you regularly work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.