An opportunity arose last week when the IRS delayed its enforcement of the new law that mandates workers earning over $145,000 a year to make catch-up contributions solely on a Roth (post-tax) basis. This hold, which extends until 2026, was influenced by the efforts of the benefits community and retirement plan sponsors who called on the IRS for additional time to adjust to changes under the SECURE 2.0 Act. This requirement is applicable to 401(k) plans, deferred annuities under section 403(b), and government plans defined in Section 457(b).
With the SECURE 2.0 Act, mandatory tax code provisions were introduced that apply to all plans allowing catch-up contributions. This led to several queries arising from the absence of a previous model – covering topics such as whether the provision encompasses the self-employed who don’t pay Federal payroll taxes, and implications for unrelated employers, necessary participant elections, and the potential for all catch-up contributions to be made on a Roth basis.
Given the deadline for these changes was slated for 1st January 2024, the IRS responded to the requests for delay and instituted a two-year “administrative transition period.” Plans without Roth options can continue to allow catch-up contributions until January 1, 2026, and plans presently offering the Roth option can continue to make it optional.
The correct guidance on some compliance matters was offered in preview by the IRS, and it likely that:
- Mandatory Roth contributions will not be applicable for partners and other self-employed individuals, or for state and local government employees who are not covered by Social Security, according to Section 3121(b)(7).
- A nonspecific catch-up contribution election may be treated as an election for making Roth catch-up contributions.
- Participants in plans that cover more than one employer won’t have payments from different unrelated employers combined to determine if they’re subject to the Roth catch-up requirement.
- Contributions made by participants to all plans, including those of unrelated employers, will continually be combined to ascertain if the dollar limits on annual catch-up contributions have been exceeded.
The IRS is seeking comments on whether catch-up contributions can be restricted to those participants whose federally taxed wages for the previous year did not exceed $145,000, to be submitted by October 24, 2023.
Thanks to this transition period, both the IRS and Congress have an opportunity to reevaluate Section 603 and provide statutory authority that stands in agreement with the guidance given. However, there are doubts as to whether the IRS has the power to provide guidance that seems to conflict with statutory language. To change the intended effective date of Section 603 or to reinstate catch-up contributions, a statutory amendment may be needed.
The extension also provides Congress with the chance to simplify compliance with Section 603 and make it uniform. Applying the Roth catch-up requirements to highly compensated employees would mean that new compensation limits do not need to be tracked. There is no policy reason to exempt self-employed individuals from the Roth requirements. Including them would bring equality in how employees and self-employed persons would be treated for catch-up contribution purposes.