Compliance News | August 30, 2023
Under SECURE 2.0, catch-up elective contributions for some higher-paid participants must be limited to Roth contributions. New guidance from the IRS provides welcome relief by delaying for two years the time by when plans and individuals must comply with that requirement. The new effective date is January 1, 2026.
The IRS asks for comments on the requirement, including on four specific issues. Comments are due by October 24, 2023.
SECURE 2.0 limits participants who had FICA wages from their employer greater than $145,000 (indexed) for the prior year to making catch-up contributions only in the form of a Roth deferral. Other participants could continue to choose between making catch-up contributions as a pre-tax deferral or a Roth deferral. “Catch-up” contributions are additional deferrals that employees who have attained at least the age of 50 during the year may make.
Plan sponsors quickly identified serious administrative concerns with implementing the change by January 1, 2024. Many plans do not allow for Roth contributions. Adding Roth contributions could require collective bargaining or a legislative session. In addition, because of the FICA income limit, coordination between payroll administrators and pension recordkeepers is needed. For multiemployer plans and multiple-employer plans, there is a lack of clarity as to who is the employer. Governmental plans must have any amendments approved by the legislature or other governing body.
In recognition of the problems, the IRS issued Notice 2023-62, which delays enforcement of the provision until January 1, 2026.
Notice 2023-62 also clarifies a concern that SECURE 2.0 inadvertently deleted all catch-up contributions; the IRS confirmed that catch-up contributions were not eliminated.
The IRS has asked for comments on three positions it anticipates adopting:
The IRS has also asked whether the guidance should make an exception to the rule that elective contributions must be available to all participants if available to one — the “universality” rule. Creating an exception would allow a plan that does not allow for Roth contributions for any participant currently to provide a Roth option only for participants with FICA wages greater than $145,000.
Plan sponsors should not wait until 2025 to work out issues and logistics that can be addressed now. These are mainly the administrative and employment tax issues necessary for the payroll staff and the recordkeeper to coordinate.
This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.