The IRS provided relief to the onerous SECURE 2.0 provision requiring that age-50 catch-up contributions be made on a Roth basis for individuals making more than $145,000 from that employer in the prior year. The implementation of this provision has been delayed from 2024 to 2026.
IRS Delays Roth Rules: Background
Beginning in 2003, participants were able to make additional deferrals into a defined contribution (DC) plan beginning with the year they reach age 50. Historically, participants were able to designate these catch-up contributions as either pre-tax or Roth, if the plan offered Roth deferrals.
SECURE 2.0 added a tax revenue-generating provision to the existing catch-up contribution requirements, effective in 2024. Essentially, any catch-up contributions made on behalf of individuals making more than $145,000 from the plan sponsor for FICA purposes must be designated as Roth. This provision was the cause of significant confusion and consternation for plan sponsors, payroll providers, and recordkeepers due to the complexity and uncertainty on implementation. For example:
- Payroll systems were not programmed to track the $145,000 limit
- Reporting with FICA wage information would not be available at the beginning of the year to ensure the mandatory Roth catch-ups are applied correctly
- Not all DC plans offer Roth (and according to SECURE 2.0, any plan with catch-up contributions would have to add Roth for all participants)
- It was unclear how to override existing elections the participants had made designating pre-tax catch-up contributions
The IRS issued guidance on Aug. 25 providing that plans would not be required to mandate these Roth catch-up contributions based on income levels until 2026, and that any plans offering catch-up contributions would have until 2026 to add Roth deferrals.
In addition, a drafting error in SECURE 2.0 had accidentally removed a provision that authorized any age-50 catch-up contributions. This guidance also clarified that the inadvertent deletion in SECURE 2.0 would not impact the ability to make catch-up contributions.
This guidance applies to 401(k), 403(b), and governmental 457(b) plans.
The IRS noted that future guidance will cover implementation concerns and forecast the potential guidance will address how to override the participants’ elections and how to calculate the wages from different participating employers.
This guidance is welcome relief to plan sponsors that offer catch-up contributions. The IRS has acted in a timely and accommodating manner to allow all parties time to consider how to implement and administer this provision. Plan sponsors should incorporate timing and resources to implement this provision, and other provisions from SECURE 2.0, into their planning over the next two years. This may include plan amendments, updates to required reporting, payroll programming, recordkeeping systems, and employee communications.
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