IRS provides two-year transition relief from rule that catch-up contributions for certain high earners must be made on a Roth basis
SECURE 2.0 provides that, beginning in 2024, a participant eligible to make 401(k) “catch-up” contributions (generally participants age 50 and over) whose wages for the preceding calendar year exceed $145,000 may only make catch-up contributions on a “Roth basis.” There has been considerable sponsor and provider concern that the 2024 compliance date for this rule could not be met.
Two-year delay/”administrative transition period”
On August 25, 2023, IRS released Notice 2023-62 (Guidance on Section 603 of the SECURE 2.0 Act with Respect to Catch-Up Contributions), which provides, among other things, a two-year “administrative transition period” (until taxable years beginning after December 31, 2025) under which participants affected by the new SECURE 2.0 “Roth-only catch-up contribution” rule may continue to make non-Roth catch-up contributions.
Bottom line: the new SECURE 2.0 “Roth-only catch-up contribution” rule will not apply until 2026.
Possible further catch-up contribution guidance
In the Notice, IRS also identified three areas under the new SECURE 2.0 “Roth-only catch-up contribution” rule with respect to which it was considering further guidance:
Guidance clarifying that the rule “would not apply in the case of an eligible participant who does not have wages … for the preceding calendar year from the employer sponsoring the plan.”
Guidance providing that, with respect to a participant to whom the rule applied, the plan administrator/employer could treat a pre-tax catch-up contribution election as a Roth contribution election
Where a plan is maintained by more than one employer, guidance that wages from one employer would not be aggregated with wages from another participating employer for purposes of the $145,000 “test.”
IRS requested comments on these issues. It also requested comments on whether a sponsor might be permitted to simply disallow any catch-up contributions for participants affected by the new SECURE 2.0 “Roth-only catch-up contribution” rule.
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We will continue to follow this issue.