IRS delays SECURE 2.0’s Roth catch-up mandate until 2026 

August 29, 2023

Newly released IRS guidance provides a welcome two-year delay of the Roth catch-up mandate, originally scheduled to take effect next year for high-earning employees under the SECURE 2.0 Act of 2022 (Div. T of Pub. L. No. 117-328). Notice 2023-62 also previews more comprehensive guidance IRS expects to issue in the future and confirms that catch-up contributions are still permitted after this year, despite an apparent drafting error in SECURE 2.0. Comments on the notice are due Oct. 24.

Defined contribution (DC) plans can allow employees ages 50 and older to make catch-up contributions above the otherwise-applicable deferral limit (e.g., the Section 402(g) deferral limit or a lower limit set by the plan). Catch-up contributions are limited to an annually indexed dollar amount ($7,500 in 2023). SECURE 2.0 introduced several changes effective in 2024 to the catch-up contribution rules for 401(k), 403(b) and governmental 457(b) plans:

• High-earning employees those whose Federal Insurance Contributions Act (FICA) wages in the prior calendar year from the employer sponsoring the plan exceeded $145,000 (indexed after 2024) can make catch-up contributions only on a Roth basis.
• Other eligible employees who aren’t high earners must be allowed to make Roth catch-up contributions if at least one employee is subject to the Roth catch-up mandate for a plan year. (This suggests that plans offering catch-up contributions will need to have a Roth feature.)

Citing the administrative challenges of implementing these changes for next year, more than 225 employers (including Mercer) recently signed a letter to Congress and the Treasury Department urging a two-year delay.

Two-year administrative implementation period. Notice 2023-62 provides a two-year “administrative implementation period” for the changes discussed above. During this period, the following is allowed:

• DC plans can continue accepting pretax catch-up contributions from all employees, including employees who would otherwise be subject to the Roth mandate.
• Plans without Roth features don’t have to add one to give employees the option to make Roth catch-up contributions. (Some of these plans may have been preparing to add Roth features or eliminate catch-up contributions next year.)

The notice asks whether IRS should issue permanent guidance allowing plans without Roth features to limit catch-up contributions to employees who aren’t high earners. However, the notice doesn’t ask whether IRS should give plans with Roth features similar flexibility to simplify administration by eliminating catch-ups for high earners or requiring all employees to make Roth catch-ups.

More comprehensive guidance forthcoming. While the notice doesn’t preclude plans from implementing the Roth catch-up mandate before 2026, the notice’s limited scope likely will deter sponsors from doing so for the time being. The agency expects to issue the following guidance that will:

• Confirm the Roth catch-up mandate’s inapplicability to employees with no FICA wages from the employer in the prior year, including partners and other self-employed individuals, and certain state or local government employees
• Provide flexibility for plan administrators and employers to automatically treat high earners’ pretax catch-up elections as elections to make Roth catch-up contributions, thus avoiding the need for separate pretax and Roth catch-up elections
• Clarify that plans maintained by more than one unrelated employer — including multiemployer and presumably multiple employer plans (MEPs) and pooled employer plans (PEPs) — wouldn’t need to aggregate an employee’s prior-year wages from more than one participating employer when determining whether the Roth catch-up mandate applies to that employee, and each participating employer can base high-earner determinations solely on prior-year earnings from that employer

But this list falls short of the full scope of regulatory guidance employers and their service providers will likely require. Agency guidance is also needed to address the following issues:

• Applying the Roth catch-up mandate to plans maintained by employers in the same controlled group, including to employees who transfer among those employers
• Applying the indexed compensation threshold for years after 2024
• Correcting administrative errors, such as failing to properly treat an employee as a high earner
• Treating high earners’ pretax contributions as Roth catch-up contributions to correct actual deferral percentage (ADP) testing failures
• Clarifying whether the Roth mandate applies to special catch-up contributions under 403(b) and 457(b) plans

The notice confirms that IRS will enforce existing rules for catch-up contributions in 2024 and future years, despite a SECURE 2.0 drafting error that appears to inadvertently eliminate all catch-up contributions starting in 2024. Key House and Senate leaders intend to introduce a technical corrections bill clarifying that catch-ups are still permitted, but the timing for such a measure remains unclear.

• Notice 2023-62 (IRS, Aug. 25, 2023)
• News release (IRS, Aug. 25, 2023)
• Employers’ letter to Congress and Treasury seeking delay on Roth catch-up mandate (American Benefits Council, July 14, 2023)
• Congressional letter to Treasury and IRS on SECURE 2.0 corrections (House Ways and Means and Senate Finance committees, May 23, 2023)
• Div. T of Pub. L. No. 117-328, the SECURE 2.0 Act of 2022 (Congress, Dec. 29, 2022)

• User’s guide to SECURE 2.0 (regularly updated)
• Congress pens letter to Treasury, IRS on SECURE 2.0 corrections (June 26, 2023)
• Implementing SECURE 2.0’s Roth provisions may tax DC plan sponsors (April 11, 2023)