Time Is Your Friend: IRS Offers Two-Year Transition Period To Implement the SECURE 2.0 Act’s Roth Catch-Up Requirement

Employee Benefits & Executive Compensation

On August 25, 2023, the Internal Revenue Service (IRS) released Notice 2023-62, which provides temporary relief regarding one of the SECURE 2.0 Act’s most challenging requirements. Section 603 of SECURE 2.0 requires that catch-up contributions for participants with FICA wages (from the employer maintaining the plan) of more than $145,000 (as indexed) during the prior calendar year be made on a Roth basis. This requirement was set to go into effect on January 1, 2024, but the effective date has now been delayed for two years. Notice 2023-62 also outlines guidance that the IRS intends to issue (subject to comment) regarding the implementation of the Roth catch-up requirement. 

Two-Year Transition Period

As background, Section 414(v)(1) of the Internal Revenue Code (the “Code”) provides that 401(k), 403(b), and government 457(b) plans will not be treated as failing to meet any requirement of the Code solely because the plan permits an eligible catch-up contribution in any plan year. Section 603(a) of the SECURE 2.0 Act amends Code Section 414(v) by adding Section 414(v)(7), which provides that Section 414(v)(1) applies only if catch-up contributions elected by a participant who earns FICA wages of more than $145,000 (as indexed) during the prior calendar year are designated Roth (i.e., after-tax) contributions. 

This new requirement was scheduled to take effect on January 1, 2024, creating significant work for plan sponsors and service providers in the form of programming changes to payroll and plan systems, creation of communications, and related efforts to implement the new rule under the quick timeline. Notice 2023-62 offers a two-year transition period to implement the SECURE 2.0 Act’s Roth catch-up requirement extending the implementation date to January 1, 2026.

Additionally, plans that do not currently offer Roth contributions may continue to allow pre-tax catch-up contributions by participants with FICA wages of more than $145,000 during the transition period.

Additional Guidance Under Consideration

Notice 2023-62 also describes the intent of the Treasury Department and the IRS to issue further guidance to assist taxpayers with the implementation of Section 603 of the SECURE 2.0 Act, which includes:

  1. Clarifying that Section 603 will not apply to self-employed individuals, governmental employees, or other employees who are not paid FICA wages.
  2. Specifying that in the case of a participant who is subject to the Roth catch-up requirement, the plan administrator and employer would be permitted to treat an election by the participant to make catch-up contributions on a pre-tax basis as an election by the participant to make catch-up contributions that are designated Roth contributions.
  3. Providing that for purposes of applying the Roth catch-up requirement to participants whose employer plan is maintained by more than one employer (including a multiemployer plan), a participant’s wages for the preceding calendar year from one participating employer would not be aggregated with the wages from another participating employer for purposes of determining whether the participant’s wages for that year exceed $145,000 (as indexed).

Next Steps

Notice 2023-62 provides good news and much-needed additional time for plan sponsors and service providers to comply with the SECURE 2.0 Act’s Roth catch-up contribution requirement. However, because of the significant administrative challenges the requirement presents, plan sponsors and service providers should continue their efforts in order to smoothly implement the changes as of the new January 1, 2026, effective date. Written comments on Notice 2023-62 must be submitted to the IRS by October 24, 2023.  

If you have any questions about Notice 2023-62 or the mandatory and optional provisions of the SECURE 2.0 Act in general, please contact any member of Calfee's Employee Benefits and Executive Compensation practice group.

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