SECURE Act 2.0—the sprawling piece of legislation passed at the end of 2022— includes several provisions related to retirement plans. Here, we dive deeper into the catch-up contribution rule that applies to 401(k), 403(b), and 457(b) plans, and how the IRS delay will help you better prepare.
Mandatory Roth Catch-Up for High-Wage Earners
Currently, a participant aged 50 and over may elect catch-up contributions on either a pre-tax or Roth basis (assuming the plan allows for Roth). Under the new rule, catchup contributions for employees with wages over $145,000 (indexed) in the prior year must be Roth.
Roth contributions to a retirement plan are made after tax—earnings are not taxable—and withdrawals at retirement are generally tax free.
Issues With the Roth Catch-Up
While this provision may seem straightforward at first glance, several problems had surfaced. There was a technical problem in the way the legislation was written, which would have inadvertently eliminated the catch-up altogether. Technical guidance was also needed on many questions raised, such as the definition of wages and the ability of employers to determine prior year compensation for multi-employer plans. Finally, service providers—including recordkeepers and payroll providers—needed additional time to prepare for the administrative burdens associated with the rule.
Industry groups lobbied for—and were granted—the delay and guidance for administration; however, you should stay informed so you are prepared when the extended deadline approaches.
Although no immediate changes are needed, there are several things you should do during this newly granted two-year transition period while you have the time:
- Conduct business as usual: The notice clarifies that catch-up contributions are intended to be permitted in general and that catch-up eligible participants exceeding $145,000 in wages are deemed to comply with the Roth catch-up even if the contributions are not designated Roth.
- Plan for implementation: The delay provides you with more time to determine what is in the best interest of your employees. Stay informed of any updates and speak to your service providers to make sure they are prepared to support this provision at the end of the transition period.
- Educate and inform: The delay allows for comprehensive educational efforts. Keep impacted employees up-to-date so they can make more informed retirement decisions.
- Look for more on self-employed income: The expected IRS guidance will clarify that the Roth catch-up will not apply to partner and self-employed individuals with no FICA wages. However, it is unclear whether IRS has the authority to issue guidance that that may conflict with the statutory language. Stay tuned for updates on this topic.
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