IRS Delays Roth Catch-Up Provision Mandated by SECURE 2.0
Episode 247 – IRS delays the SECURE 2.0 requirement for catch-up contributions for highly paid employees age 50 and over to be made as Roth contributions.
Transcript of Podcast Episode 247
Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, IRS Delays Roth Catch-Up Provision Mandated by SECURE 2.0.
On December 29, 2022, the Consolidated Appropriations Act, 2023 (“the Act”) was enacted and it included the provisions for the law titled Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (commonly dubbed “SECURE 2.0”). SECURE 2.0 contained several retirement planning provisions that built upon the original SECURE Act that passed three years earlier. Most notably, SECURE 2.0 increased the age for individuals to commence taking Required Minimum Distributions (RMDs) from age 72 to age 73 if attained in 2023 or later (and to age 75 if attained in 2033 and later).
As you may know, employees who are 50 years of age and older may make additional contributions to their 401(k) plans, over and above the typical maximum contribution for that year, to allow them to “catch-up” on their retirement savings. SECURE 2.0 contained a lesser-known provision that mandated “catch-up” contributions be made as Roth contributions if the employee made more than $145,000 the previous year. This had the effect of forcing higher paid employees to pay income taxes now on the catch-up contributions, rather than making them on a pre-tax basis. This was supposed to start on January 1, 2024.
Many of the largest 401(k) plan administrators lobbied the IRS to delay the commencement of this requirement because of insufficient time to modify systems to account for these contributions. Also, many plan documents did not provide for after-tax Roth catch-up contributions so these plan documents needed to be amended to comply with SECURE 2.0.
On August 25, 2023, the IRS relented and issued Notice 2023-62. In this Notice, the IRS extended the effective date of this new requirement to January 1, 2026, allowing plan administrators an additional two years to update systems and for plan documents to be amended to comply. So, for the time being, employees making over $145,000 can still choose to make catch-up contributions either as pre-tax contributions, or after-tax Roth contributions, assuming the plan allows for that.
In addition, this Notice fixed an inadvertent mistake in SECURE 2.0 which contained a provision that eliminated the ability for any employee, regardless of compensation level, to make catch-up contributions beginning in 2024. Congress mistakenly deleted a part of the tax code that allowed for catch-up contributions. This was an obvious mistake so the IRS said that it will still allow for catch-up contributions.
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