Take-Away: The ability to make catch-up contributions to retirement accounts in 2024 is in jeopardy, and at present, no one appears to want to make it a priority to fix this problem.

Background: Previously it was reported about the drafting error that was contained in the SECURE Act 2.0. One of the more controversial provisions of that Act is the requirement that if an individual makes more than $145,000 FICA wage, his/her catch-up contribution to their retirement plan account, starting in 2024, must be a Roth contribution. That means that this limited class of retirement account owners who wish to make a catch-up contribution must use after-tax dollars for that make-up contribution. This surprise provision was included in the SECURE Act 2.0 to ‘finance’ (by forcing accelerated tax revenues) some of the other perceived tax ‘breaks’ included in the Act.

Drafting Error- The Dominos Start to Fall: Adding to this surprise provision of the Act [Section 603] was a drafting mistake that became part of the new law. The drafting error was that the new law struck all of IRC 402(g)(1)(C) from the Tax Code. The result of its elimination was that no plan participant will be able to make any catch-up contributions (either pre-tax or post-tax Roth) starting in 2024. Needless to say, this makes a lot of plan participants who want to save for their retirement very unhappy.

Update of the “Fix:” There has been a bit of activity addressing the ‘problem’ but no real solution so far in 2023.

  • Treasury: This mistake in drafting the Act was soon caught in late January, 2023. Treasury, charged with drafting implementing Regulations for the Act, then wrote Congress with regard to seeking to confirm the Congressional intent behind Section 603.
  • Congress: The response from the key Committees in Congress charged with drafting the Act noted that “it might be read by some to disallow catch-up contributions (whether pre-tax or Roth) beginning in 2024.” The response then  went on to note “This outcome was not Congress’ intent” as indicated by reference to the Senate Finance Committee Report.
  •  Plan Sponsors: On June 29, 2023 a group of large employer retirement plan sponsors, including the American Retirement Association, wrote a letter to Treasury, as part of its lobbying campaign, in which it asked for a two-year delay of the Section 603 Roth catch-up requirement. The concern of this group, with a focus less on the ability to make catch-up contributions and more on the required Roth catch-up contribution,  is that it will take substantial time to coordinate payroll systems with plan recordkeeping systems, with real reservations that compliance with Section 603 cannot become effective starting in 2024.
  • Default Position: With those reservations by the plan sponsors,’ their letter concluded that a threatened default position of such plans will be to completely eliminate all catch-up contributions in their retirement plans, at least until they get updated systems in place if the two-year delay is not implemented.

Observation: Does Treasury even have the regulatory authority to ignore the Section 603 drafting error? Probably not; it is part of the law, and the ability to make catch-up contributions is currently no longer part of the Tax Code.

Nor is it clear that Treasury either possesses the authority, or the willingness, to implement the plan sponsors’ requested two-year delay to implement the Roth catch-up requirement, or provide some other type of Section 603 compliance relief.

Conclusion: Section 603 of the SECURE Act 2.0 has created a real mess. Most likely it requires Congress, not Treasury, to fix the problem that it created when it adopted the Act in the ‘eleventh’ hour of 2022 (without reading it, no doubt.) As this is written in July, 2023, over half of 2023 is behind us with no ‘fix’ in sight. It may be that with Congress headed for its summer recess, and budget battles looming in the fall when they return to the Capitol, that the Section 603 problem will not get ‘fixed’ before the end of 2023. Haste makes waste?