SECURE Act 2.0: The IRS makes life easier (temporarily, at least) with interim guidance regarding SECURE Act 2.0 catch-up contribution provisions

Addressing one of the myriad of impending administrative headaches for employers stemming from SECURE Act 2.0, the IRS released Notice 2023-62 regarding catch-up contributions.

As we previously noted, SECURE Act 2.0 provides that, effective for tax years beginning after December 31, 2023, catch-up contributions, regardless of age or amount, will have to be made on a Roth basis (post-tax) unless the participant’s prior year compensation did not exceed $145,000 (in which case the participant can chose between pre-tax and Roth). Accordingly, once this requirement becomes effective, a plan will need to permit Roth contributions in order for any participant that is required to make their catch-up contributions as Roth contributions to be able to make such contributions. The retirement plan industry (plan sponsors, legal counsel, third-party administrators, etc.), anticipating that implementing these changes could take a considerable amount of time, urged the IRS and Department of Treasury to delay their implementation.

SECURE Act 2.0 also inadvertently eliminated catch-up contributions for all participants for tax years beginning after December 31, 2023. Everyone knew this error was unintended and would need to be fixed but it was not clear what the fix would be.

Highlights of Notice 2023-62:

• The IRS has instituted a two year “administrative transition period” to allow for the implementation of the Roth catch-up contribution changes for eligible participants who earned at least $145,000 in the prior year. Accordingly, this requirement will first apply for tax years beginning after December 31, 2025.
• Catch-up contributions for all eligible participants will continue to be allowed after December 31, 2023.

In addition to this much needed guidance, the IRS indicated that it will release additional guidance, subject to comments, on the following items under Section 603 of the SECURE Act 2.0:

• The Roth catch-up contribution requirement will not apply to individuals who do not have wages (as defined in Code Section 3121(a)) for the preceding plan year (e.g., partners or other self-employed individuals who receive self-employment income).
• A plan administrator can treat an election by a participant to make pre-tax catch-up contributions as an election to make Roth catch-up contributions if that participant becomes subject to the Roth catch-up contribution requirement.
• If a plan is maintained by more than one employer, an employer will not need to take into consideration wages paid to an employee by another (presumably unrelated) participating employer in the plan for purposes of determining whether the participant’s wages exceed the $145,000 mandatory Roth catch-up threshold for the preceding year.