Last year, President Joe Biden signed into law far-reaching retirement plan legislation known as the SECURE 2.0 Act that includes many new rules for employers and their qualified requirement plans. In late August 2023, the IRS issued a notice delaying for two years the implementation of one of the Act’s rules—about deferrals known as catch-up contributions—and allowing retirement plan sponsors a chance to catch up on catch-up contributions.
The notice’s comment period runs through October 24, 2023, after which time the Treasury Department and the IRS intend to issue further guidance on Section 603 of the SECURE 2.0 Act.
So what does this mean for employers and their HR teams? Here’s a look at what companies need to know as the comment deadline approaches.
The New Rules of Section 603
As you probably already know, qualified retirement plans are permitted—but are not required—to allow participants who are age 50 or older to make additional elective deferrals (including designated Roth contributions) known as “catch-up” contributions. For most plans, the catch-up contribution limit for 2023 is $7,500.
One of the SECURE 2.0 Act’s new rules—Section 603—specifically targets catch-up contributions and generally provides that effective January 1, 2024, plan participants age 50 or older who earn more than $145,000 annually and who decide to make catch-up contributions must do so on a Roth basis, using after-tax money.
Although seemingly straightforward, the new rule creates administrative complexities that made its implementation difficult for plan sponsors. For instance, employee benefit professionals recognized that to comply with the new rule, plan sponsors needed to quickly identify participants age 50 or older who earned more than $145,000 the previous year and potentially adjust their payroll systems and plans.
On August 25, the IRS released Notice 2023-62—“Guidance on Section 603 of the SECURE 2.0 Act with Respect to Catch-Up Contributions”—providing welcome guidance on the new catch-up contribution rules. Most importantly, the notice grants a two-year delay in the provision’s effective date, so catch-up contributions can now be made on a pretax basis through 2025, regardless of income.
The new transition period provides plan sponsors breathing room to implement the new catch-up contribution rules.
Keeping Up with Next Steps
Once this comment period for Section 603 of the SECURE 2.0 Act concludes on October 24, 2023, the Treasury Department and the IRS will reconvene and issue further guidance on the finalized rules pertaining to catch-up contributions. McAfee & Taft’s employee benefits and executive compensation attorneys will continue to monitor for updates to the SECURE 2.0 Act and consider their impact on plan sponsors and their plans.
Brian Beatty is an employee benefits attorney with McAfee & Taft in Oklahoma City, Oklahoma. He can be reached at brian.beatty@mcafeetaft.com.