Effective Date of Requirement that 401(k)/403(b) Catch-up Contributions of Higher-paid Employees be After-tax Roth Contributions Delayed to 2026
In a prior bulletin, we discussed the requirement that 401(k) and 403(b) catch-up contributions by higher-paid employees (those with FICA wages in excess of $145,000) be made on an after-tax Roth basis, in lieu of a traditional pre-tax basis, effective for 2024 and subsequent years. This requirement was imposed by the “SECURE 2.0” law enacted in December 2022.
In recent months, 401(k)/403(b) industry groups such as the American Retirement Association had been lobbying the IRS for a delay in the effective date of this provision. Reasons for the request for the delay included (a) the need for guidance from the IRS on the nuances involved in the application of the requirement, and (b) the time required to update payroll and plan recordkeeping systems to accommodate the requirement.
In response to these pleas, the IRS issued Notice 2023-62 (the “Notice”) on August 25, 2023. The Notice provides for an “administrative transition period” during which all employees, regardless of income level, will be permitted to continue to make 401(k)/403(b) catch-up contributions on a traditional pre-tax basis. The transition period runs through the end of 2025, delaying the effective date of the requirement to January 1, 2026.
In the Notice, the IRS also indicated its intent to issue further guidance to assist plan sponsors and their service provides with the implementation of the requirement. Preliminary descriptions of expected guidance mentioned in the Notice include the following:
- Plan participants who did not have FICA wages from the plan sponsor in the prior year (e.g., individuals such as partners in a partnership receiving only self-employment income) will not be subject to the requirement.
- Employers with plan participants subject to the requirement (those with FICA wages over $145,000) will be permitted to treat 401(k)/403(b) catch-up contribution elections by the participants as elections to make after-tax Roth contributions; separate Roth contribution elections will not necessarily be required.
We will continue to update plan sponsors as additional guidance becomes available. In the meantime, employers and 401(k)/403(b) service providers can take comfort in the fact that existing plan operations in this area can continue for two more years.
In anticipation of the requirement becoming effective January 1, 2024, some employers that maintained plans without the Roth contribution feature have already amended their plans and taken other steps to add the Roth feature effective January 1, 2024. While such plans could be further amended to postpone addition of the Roth feature until 2026, we expect that the preferred approach will be to implement the Roth feature as scheduled for 2024, as it is eventually going to be needed, and employees may appreciate availability of the Roth feature prior to the effective date of the requirement involving catch-up contributions in any event.
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