On Friday, August 25, 2023, the Internal Revenue Service (IRS) issued Notice 2023-62, which provides a two-year transition period for the implementation of the new Roth “catch-up” contribution requirement of the SECURE 2.0 Act. In addition to this welcome relief, the IRS signaled its intention to issue future guidance to clarify that certain individuals, including Social Security replacement plan participants, are not subject to the Roth catch-up requirement at all. If confirmed, this interpretation would have a significant impact on participants in Social Security replacement plans, as well as the public retirement systems and public employers that sponsor or participate in such plans.

Read about the transitional relief provided by Notice 2023-62. 

Social Security Replacement Plans

State and local employees who participate in a public retirement system that meets certain minimum benefit requirements are not subject to mandatory Social Security coverage. These plans are referred to as “Social Security replacement plans” because they are intended to provide a retirement benefit that is comparable to (or better than) the Social Security benefit that the participant would have received if his or her earnings were covered by Social Security. As a result, Social Security replacement plan participants do not pay Social Security taxes (and their employers do not pay the employer share of Social Security taxes), unless their positions are covered by Social Security through an agreement between their State and the Federal government known as a Section 218 agreement. Except in rare circumstances, all State and local employees are subject to Medicare taxes.

The Roth Catch-Up Contribution Requirement Under SECURE 2.0

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. Under current law, 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.

Section 603 of the SECURE 2.0 Act amends Code Section 414(v) to provide that if a participant has wages, as defined in Code Section 3121(a), for the preceding calendar year from the employer sponsoring the plan that exceed $145,000 (indexed after 2024), then the participant must designate age 50 catch-up contributions as Roth contributions. Code Section 3121(a) defines “wages” for purposes of Social Security and Medicare taxes, and therefore is commonly referred to as “FICA wages”.

FICA Wages and Social Security Replacement Plans

FICA wages are defined under Code Section 3121(a) as remuneration from “employment” as defined by Code Section 3121(b). For this purpose, “employment” does not include the services performed by State and local employees who participate in a Social Security replacement plan, except for purposes of determining their Medicare taxes. This exclusion gives rise to potentially two different interpretations of how the new Roth catch-up requirement under Code Section 414(v)(7) applies to Social Security replacement plan participants.  

• Under one interpretation, FICA wages for Social Security replacement plan participants would mean the wages that are reported as subject to Medicare tax. Since employers of replacement plan participants track FICA wages for Medicare withholding, they would have the wage information necessary to implement Code Section 414(v)(7). Under this interpretation, the Roth catch-up contribution requirement would apply to Social Security replacement plan participants whose wages reported for Medicare in the preceding calendar year by the employer sponsoring the plan exceeded $145,000 (indexed after 2024).
• Under an alternative interpretation, Social Security replacement plan participants would be treated as not having FICA wages, except for the sole purpose of determining Medicare taxes only. For all other purposes, including application of Code Section 414(v)(7), services performed by State and local employees in a Social Security replacement plan would be excluded from the definition of “employment” under Code Section 3121(b) and, therefore, the definition of “wages” under Code Section 3121(a). Under this interpretation, the Roth catch-up contribution requirement would not apply to any Social Security replacement plan participant, regardless of income.

In Notice 2023-62, the IRS takes a position consistent with the second interpretation above and anticipates providing additional guidance that is expected to clarify that Code Section 414(v)(7) does not apply to certain individuals, including State and local employees who participate in a Social Security replacement plan.  

Of course, the IRS may change its position after it reviews comments submitted in response to Notice 2023-62, which are requested by October 24, 2023. In addition, if the IRS’s interpretation is not consistent with Congressional intent, Congress could pass legislation to address this. In any event, under the transition relief provided by Notice 2023-62, public retirement systems and public employers that sponsor or participate in a Social Security replacement plan would not be required to implement this requirement any earlier than January 1, 2026, if at all. We will continue to monitor this issue and provide updates on any future guidance or legislation. 

For more information about how SECURE 2.0 might affect your employee benefit plans, please contact Audra Ferguson, Rob Gauss, Lisa Harrison, Lindsay Knowles, Shalina Schaefer, 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.