A Reprieve in the Catch-Up Contribution Rules

Take-Away: The anxiety caused by the SECURE Act 2.0 with regard to mandating Roth catch-up contributions just got a 2-year reprieve.

Background: The SECURE Act 2.0, Section 603, contained a surprising new rule with regard to catch-up contributions to retirement accounts by higher-paid employees to their qualified plan accounts, like a 401(k) account (or 403(b) or governmental 457(b) plans.) This new rule change is that for an  individual participant, age 50 and older, and who had Social Security wage income in the prior year of $145,000 or more, any catch-up contributions made by him/her to their retirement plan had to be Roth catch-up contributions, which means that those catch-up contributions had to be made with after-tax dollars. [IRC 414(v).] Apparently this rule change is intended to accelerate income tax revenues in order to ‘finance’ other tax savings provisions under the SECURE Act 2.0.

This rule change created a lot of confusion and angst among plan participants, not to mention the provision’s complete omission of the catch-up contribution opportunity in the Tax Code which, in turn,  caused many to believe that no one would be able to make any catch-up contribution whatsoever starting in 2024, regardless of their level of income.

Delayed Implementation: On August 25, 2023 the IRS announced an administrative transition period in Notice 2023-62 that extends until  2026 the new requirement that any catch-up contributions made by higher-income participants in 401(k) and comparable retirement plans must be designated as after-tax Roth contributions.

Continued Catch-up Contributions: The same Notice also clarified that plan participants who are age 50 and over can continue to make catch-up contributions after 2023, regardless of their income.

The claimed purpose behind this administrative transition Notice is intended to help plan participants transition more smoothly to the new Roth catch-up retirement and also to enable qualified plan sponsors more time to implement amendments to their plan documents to add this new catch-up contribution provision to their plan (in the past, a Roth feature to a qualified plan was solely at the sponsor’s option.)

Conclusion: The cynic in me believes that once again the IRS with its continuing spat of administrative Notices is covering for a sloppy (or dare I say lazy) Congress that now waits until the bitter end of a legislative session and then slams through multiple bills without much thought or, God forbid, actually having read the proposed legislation before voting on it. But what do I know!