As you probably already know, qualified retirement plans are permitted, but are not required, to allow participants who are age 50 or older to make additional elective deferrals (including designated Roth contributions), known as “catch-up” contributions. For most plans, the catch-up contribution limit for 2023 is $7,500.
Last year, President Biden signed into law far-reaching retirement plan legislation known as SECURE 2.0 Act that included many new rules for employers and their qualified requirement plans. One of the new rules, Section 603 of the SECURE 2.0 Act, specifically targets catch-up contributions. This new rule generally provides that effective January 1, 2024, plan participants age 50 or older who earn more than $145,000 annually and who decide to make catch-up contributions must do so on a Roth basis, using after-tax money.
Although seemingly straightforward, this new rule creates administrative complexities that made its implementation difficult for plan sponsors. For instance, employee benefit professionals recognized that in order to comply with the new rule, plan sponsors needed to quickly identify those participants age 50 or older who earned more than $145,000 the previous year and potentially adjust their payroll systems and plans.
IRS delays implementation deadline by two years
Just last Friday, the IRS released Notice 2023-62, “Guidance on Section 603 of the SECURE 2.0 Act with Respect to Catch-Up Contributions,” that provides welcome guidance on the new catch-up contribution rules. Most importantly, the Notice grants a two-year delay in the provision’s effective date so catch-up contributions can now be made on a pre-tax basis through 2025, regardless of income. This new transition period provides plan sponsors breathing room to implement the new catch-up contribution rules.
The Notice’s comment period runs through October 24, 2023, after which time the Treasury Department and the IRS intend to issue further guidance on Section 603 of the SECURE 2.0 Act.
McAfee & Taft’s Employee Benefits & Executive Compensation attorneys will continue to monitor for updates to SECURE 2.0 Act and consider their impact on plan sponsors and their plans.