Understanding the New Guidelines
Extension of Roth Catch-Up Contribution Requirement
Background: Traditionally, individuals aged 50 or older participating in retirement plans such as 401(k) and 403(b) have been able to make additional contributions, known as catch-up contributions. These could be made on a pre-tax basis or as after-tax Roth contributions, depending on the plan’s provisions.
The Change: The SECURE 2.0 Act introduced a mandate that, starting from tax years after Dec. 31, 2023, high-income individuals (those earning over $145,000) must make these catch-up contributions on a Roth basis. This change raised concerns among employers and plan administrators about the short timeline for implementing necessary adjustments.
The Update: In response, the IRS has now postponed the effective date for this requirement to plan years beginning after Dec. 31, 2025. This delay allows plan sponsors to continue administering catch-up contributions without the new Roth requirement until the 2026 plan year.
Clarification on Post-2023 Catch-Up Contributions
The Issue: A legislative oversight in Act section 603 led to the unintended termination of catch-up contributions from 2024.
The Resolution: The IRS's Notice confirms that catch-up contributions will indeed continue to be available beyond Dec. 31, 2023. This assurance aligns with Congress's original intent for these contributions to be a source of tax revenue.
The Impact: Individuals over 50 can still make additional contributions to their retirement plans, either as pre-tax or Roth catch-up contributions. The annual deferral limit for 2023 is $22,500, which increases to $30,000 when including the maximum catch-up of $7,500.
Ongoing Considerations and Future Guidance
Despite this clarification, there are still areas needing further guidance from the IRS, including:
Mandatory Roth Treatment for Self-Employed and Governmental Employees: Questions remain on how this applies to individuals not receiving FICA-subject wages.
Handling of Pre-Tax Contribution Elections: Clarification is needed on how plan sponsors should manage pre-tax catch-up contributions for individuals exceeding the income threshold for mandatory Roth contributions.
The IRS's recent Notice not only ensures the continuity of catch-up contributions but also provides a transition period for the mandatory Roth treatment for high-income individuals. This delay is pivotal for employers and recordkeepers in amending their plan documents and implementing the new rules effectively.
Employers should stay alert for further IRS guidance and collaborate with recordkeepers and legal counsel to adapt their plans accordingly, ensuring compliance with the evolving regulations.