IRS Grants Two-Year Extension for Roth Catch-Up Contributions Under SECURE 2.0 Act. In a significant relief for plan sponsors, the IRS has announced a two-year extension for complying with the SECURE 2.0 Act of 2022, which requires certain eligible participants’ catch-up contributions to be designated as Roth contributions. This development, detailed in IRS Notice 2023-62, offers much-needed flexibility to implement the new rule while hinting at additional guidance to come.
Roth Contributions: A SECURE 2.0 Act Mandate
The SECURE 2.0 Act brings several changes to tax-qualified retirement plans, including a mandate that individuals earning over $145,000 in the preceding tax year must have their catch-up contributions designated as Roth contributions, starting in January 2024. Previously, employees had the choice of making catch-up contributions on a pre-tax or Roth basis if their employer’s plan allowed it.
Two-Year Administrative Transition Period
Initially, compliance with this new rule was set to begin on January 1, 2024, posing immediate challenges for plan sponsors, especially governmental employers offering 457(b) plans, and related parties. In response, Notice 2023-62 confirms that while the new rule takes effect on January 1, 2024, the first two years will serve as an administrative transition period. During this time:
- Catch-up contributions will fulfill the SECURE 2.0 Act requirement, even if not designated as Roth contributions.
- Plans not offering designated Roth contributions will still be considered compliant with the SECURE 2.0 Act requirements.
The notice also addresses a drafting issue in the statute that could have potentially removed catch-up contributions from the Internal Revenue Code.
Potential Guidance in the Pipeline
Notice 2023-62 suggests that the IRS is contemplating further guidance that could:
- Exempt eligible participants without wages for FICA purposes in the previous calendar year from the requirement (e.g., self-employed individuals).
- Allow plan administrators and employers to treat pre-tax catch-up contribution elections by affected participants as deemed Roth elections.
- Clarify how the rule applies to plans involving multiple employers.
What Lies Ahead
Notice 2023-62 provides valuable breathing room for plan sponsors and related parties as they navigate the SECURE 2.0 Act’s critical aspect. As additional SECURE 2.0 Act guidance emerges, plan sponsors are encouraged to collaborate with their advisors to understand the necessary changes, both mandatory and optional.
Stay tuned for future McGuireWoods WorkCite updates, which will continue to monitor and report on significant developments related to the SECURE 2.0 Act.