Mandatory Roth Catch-up Provision Postponed Until 2026

The controversial SECURE 2.0 Act provision requiring “catch-up contributions” for high-paid employees to be made on a Roth basis was set to take effect on January 1, 2024. The requirement from SECURE 2.0, part of the Consolidated Appropriations Act of 2023, was finalized in late December 2022, giving employers and plan administrators a short window to implement a significant change to their plan offerings and update their systems. Specific IRS guidance was also left out of the initial language, making it even more difficult for employers to ensure compliance.

After requests from recordkeepers and retirement plan lobbying organizations, the IRS has stepped in and postponed the effective date of the new provision until January 1, 2026, as part of Notice 2023-62. With guidance outlined in the Notice, no employees will be required to make catch-up contributions on a Roth basis, and plans that don’t already offer Roth contributions won’t need to offer them before January 1, 2026.

Catch-up contributions before and after SECURE 2.0

Most 401(k), 403(b), and governmental 457(b) plans allow employees aged 50 or older to make catch-up contributions on top of regular elective deferrals. The limit for catch-ups in 2023 is $7,500, allowing for total deferrals of up to $30,000. Employees were given a choice to make their catch-up contributions on a pre- or post-tax basis.

SECURE 2.0 altered the rule to require catch-up contributions for those earning more than $145,000 annually to be treated only as post-tax Roth contributions, removing the option to make them on a pre-tax basis.

More corrections to SECURE 2.0

The Notice also identifies a mistake Congress made when drafting the mandatory catch-up provision in SECURE 2.0.  A part of the tax code was accidentally deleted, with the result that no employees (high-paid or not) would be able to make any catch-up contributions (pre-tax or Roth) starting in 2024. This mistake was obvious, and the IRS says it will not enforce it.

Clarification is also given that the mandatory Roth catch-up contribution rule will not apply to the self-employed (i.e., partners in a partnership or sole proprietors) even if their income exceeds the $145,000 threshold.

08/29/2023