As part of the so-called SECURE 2.0 signed into law by the President late last year, effective for 2024, plan sponsors and recordkeepers were facing certain significant changes to the rules regarding catch-up contributions. By way of background, the term ‘catch-up’ contribution refers to the opportunity for participants, who are 50 or older, to make additional salary reduction contributions (up to $7,500 in 2023). These additional contributions are not subject to the traditional nondiscrimination testing requirements or the Section 415 limits. As such, they represent an important opportunity for older workers to increase their retirement savings on a tax favored basis.
Under SECURE 2.0, effective January 1, 2024, highly paid participants – those with FICA earnings of $145,000 or more in the immediately preceding calendar year – were required to make any catch-up contributions on an after-tax basis (i.e., Roth contributions). In addition, SECURE 2.0 mandated that plans must also afford all other participants making catch-up contributions the opportunity to voluntarily elect to make them on an after-tax basis.
Plan sponsors and recordkeepers struggled with the implementation of these new requirements. For example, since the determination of who is considered a highly paid participant is based on FICA wages, the process of identifying these participants involves data that is not necessarily being captured currently. For plans that do not currently offer Roth contributions, the implementation of the new rules was even more daunting.
In Notice 2023-62, the IRS provides much anticipated relief from these new catch-up contribution rules in the form of a two-year transition period. In other words, the effective date for the mandatory Roth catch-up requirement for highly paid participants and the opportunity for all other participants to elect Roth treatment, is now January 1, 2026. Notice 2023-62 also provides a preview of additional guidance to be provided in the future. Notably, it is anticipated that the IRS will confirm that self-employed individuals will not be subject to the after-tax catch-up mandate as they do not have FICA wages.
Notwithstanding whether you currently offer Roth contribution under your retirement plan, this is welcomed news for all recordkeepers and plan sponsors as it provides you with some much-needed time to address the new catch-up requirements and allows you to benefit from future additional guidance. If you have any questions about the catch-up contribution requirements, please contact Mark Smith or any member of the Barley Snyder Employee Benefits practice.