In a highly welcome development, the IRS recently delayed by two years the deadline for plan sponsors to comply with its requirement under the SECURE 2.0 Act of 2022, that catch-up contributions made on behalf of certain eligible participants be designated as Roth contributions.
Although the announcement in IRS Notice 2023-62 is not intended to provide comprehensive guidance on the SECURE 2.0 Act, it nonetheless provides much-needed breathing room for plan sponsors and related parties to implement the new rule, while previewing some additional guidance the IRS is considering on this topic.
Roth Contributions Under SECURE 2.0 Act
The SECURE 2.0 Act makes a variety of changes to certain tax-qualified retirement plans. One such requirement is a new mandate that catch-up contributions by individuals who earned over $145,000 during the preceding tax year be designated as Roth contributions beginning in January 2024. Previously, employees generally were allowed to choose whether their catch-up contributions were made on a pre-tax or Roth basis if their employer's plan gave them the choice.
Two-Year Administrative Transition Period
As drafted, compliance with the new rule was required to begin on Jan. 1, 2024, creating immediate challenges for plan sponsors — particularly governmental employers sponsoring 457(b) plans — and related parties to timely implement the new rule. In response, Notice 2023-62 confirms the new rule will apply on Jan. 1, 2024, but the first two years will be regarded as an administrative transition period. Specifically, until Dec. 31, 2025:
- Catch-up contributions will be treated as satisfying the new SECURE 2.0 Act requirement, even if contributions are not designated as Roth contributions.
- A plan that does not provide for designated Roth contributions will be treated as satisfying the new SECURE 2.0 Act requirements.
Notice 2023-62 also addressed a drafting issue in the statute that arguably would have eliminated catch-up contributions from the Internal Revenue Code.
Guidance Under Consideration
Notice 2023-62 indicates the IRS is considering whether to issue further guidance that would:
- Clarify that this requirement would not apply in the case of an eligible participant who does not have wages for purposes of FICA for the preceding calendar year from the employer sponsoring the plan (e.g., a partner or other self-employed individual).
- Permit plan administrators and employers to treat pre-tax catch-up contribution elections by affected participants (i.e., those subject to the new rule) as deemed Roth elections.
- Clarify how the rule works for plans with more than one employer.
Overall, Notice 2023-62 provides helpful breathing room to plan sponsors and related parties with respect to implementation of a key aspect of the SECURE 2.0 Act. As future guidance under the SECURE 2.0 Act is released, plan sponsors should work with their advisers to understand what changes, required and optional, are needed as a result.
Future McGuireWoods WorkCite updates will continue to cover significant developments on the SECURE 2.0 Act.
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