The Internal Revenue Service recently issued a Notice (2023-62) giving relief to Plan Sponsors and retirement plan providers regarding catch-up contributions starting in 2024. There are two pieces to this notice; the first is allowing catch-up contributions to continue, and the second is a “transition period” to implement the requirement that catch-up contributions must be made as Roth for those earning more than an indexed amount the prior year.
SECURE 2.0’s effect on catch-up contributions
As a reminder, a “catch-up contribution” is a deferral election made by a participant who will be 50 years of age or older in that year that is over the normal annual deferral limit. The IRS annually adjusts both the deferral limit and the catch-up limit. For 2023, the limits are $22,500 and $7,500, respectively. New limits are released in late October or early November for the following year.
When SECURE 2.0 was passed, the law's final version removed the tax deferral provision for all catch-up contributions, effectively eliminating the ability to make the additional contribution to the plan in 2024. Congress has notified the IRS that they intend to fix this error in future legislation. Although the timing is unknown, the IRS is giving permission with this notice to continue with catch-up contributions under the current rules.
The change to the catch-up contributions for the 2024 year applied to anyone who had FICA wages above $145,000 in 2023. Some are describing these employees as “Higher Paid Individuals or HPIs.” If someone had income above the threshold for the prior year, then any catch-up contributions they made would be required to be made as Roth contributions. This change would potentially require two changes to be made to the plan.
Changes to the plan
The first change would be to add the Roth deferral option to the plan if it were not already available. The addition would be required to allow anyone in the plan to defer as Roth contributions, not limit the option to only those considered HPIs and making catch-up contributions. It is considered a “benefit, right or feature” under the Code.
The second change, and the one that created the most significant pushback, was that all systems associated with deferrals (payroll, recordkeeping, etc.) would have to be updated to identify the catch-up break and change the deferral for those HPIs to Roth if they had elected deferrals to be pre-tax. The concern was that the one-year period from enactment to application was not enough time to update software to meet the challenge of the requirement.
The Notice gives a two-year transition period for everyone to update their plans and systems to meet the new requirement. Instead of catch-up contributions for HPIs being Roth starting in 2024, the requirement will begin in 2026 and use the wage limit set in 2025.
Questions?
If you have questions about how this affects your plan, please contact Brad Bechtel using the information below.
Senior Vice President
Employee Benefit Services
Brad Bechtel leads AGH’s employee benefit services (EBS) division, which serves clients nationwide. EBS is one of the region's largest providers of retirement plan recordkeeping services for daily valuation plans. The division provides consulting services to clients on employee benefit plans, including plan design, implementation, operation, fiduciary due diligence, compliance, and through affiliate AGH Wealth Management, discretionary and non-discretionary investment fiduciary services, investment advisory services and employee education.
Brad is experienced in executive compensation, including non-qualified, phantom stock, top hat and excess benefit plans, as well as other deferred compensation approaches. He has consulted for numerous Fortune 500 corporations on investment management and fiduciary due diligence. He also provides search and selection due diligence consulting services for companies seeking new investment and recordkeeping providers for their qualified plans. Brad is a registered investment advisor who holds Series 7, 24 and 66 FINRA registrations, and he is a member of the American Society of Pension Professionals & Actuaries.
NOTE: Any advice contained in this material is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the purpose of avoiding tax penalties that may be imposed by the IRS or states, or promoting, marketing or recommending to another party any transaction or matter addressed herein.