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The IRS took this action to address a drafting mistake in Section 603 of SECURE 2.0 that technically eliminated all catch-up contributions by accidentally deleting IRC Section 402(g)(1)(C). Legislators have indicated Congress intends to resolve this error with a future technical correction.

This extension was welcomed by the defined contribution retirement plan community, which had previously voiced concerns about having insufficient time to update their systems to implement the provision. Section 603 of SECURE 2.0 had originally required catch-up contributions made to a qualified retirement plan — such as 401(k), 403(b), or 457(b) plans — by higher income employees (who earned $145,000 or more in the prior year) to be made on a Roth basis beginning January 1, 2024. Despite the recent extension, additional clarification is needed for plan administrators, sponsors, and other key stakeholders to fully understand their regulatory burden.

Execution Challenges

The new so-called “Rothification” rules have generated numerous questions from key retirement plan industry stakeholders, including large employers. There were also requests for additional implementation time as well as for more detailed and clarifying regulatory guidance. For instance, the ERISA Industry Committee (ERIC) published an open letter in July 2023 that cited a number of administrative hurdles for implementation and the need for transition relief.

One concern cited was the new $145,000 income limit imposed on Roth catch-up contributions. Because it is a brand-new threshold (and not part of any existing qualified plan rule or requirement), implementation would require plan sponsors to coordinate closely with their payroll administrators, recordkeepers, and other service providers to make the necessary system updates. The new income limit is also anticipated to have a significant trickle-down impact on both sponsor and provider systems and processes.

Plan sponsors also need to develop and roll out communication of the changes to employees, which requires IRS guidance that had not yet been provided. As ERIC’s open letter indicated, the industry had concerns that starting implementation before the issuance of IRS guidance could result in costly re-work. Additionally, employers whose plans do not currently allow for Roth plan contributions faced a dilemma as to whether to eliminate catch-up contributions entirely (at least until they were able to implement a Roth program) or attempt to quickly implement a Roth option.

Welcome Relief

The IRS notice provides a two-year administrative transition period during which qualified retirement plans offering catch-up contributions will be treated as satisfying the new rules in Section 414(v)(7)(A) even if the contributions are not designated as Roth contributions throughout the transition period (or until December 31, 2025). Additionally, a plan that does not currently provide for any designated Roth contributions will still be treated as satisfying the new requirements.

The notice also identifies some topics for expected future regulatory guidance, including the following proposed IRS positions on important open questions:

• Higher-income employees with no FICA income in the preceding year would not be subject to the requirements of the new catch-up rules.
• Plan sponsors may treat higher-income earners’ pre-tax, catch-up contributions elections as default Roth catch-up elections when they become subject to the mandatory Roth catch-up treatment.
• For plans maintained by more than one employer, the preceding calendar year wages for an eligible participant would not be aggregated with wages from another participating employer for purposes of determining whether the participant’s income meets the $145,000 threshold.

Insight: Use Extension to Evaluate Next Steps  

The “Rothification” catch-up extension provides plan sponsors and the retirement plan industry with valuable time to evaluate the many legislative changes in SECURE 2.0 and strategically plan for implementation.

The post Clarifying the SECURE Act 2.0 Roth Catch-Up Contribution Extension appeared first on Walter Shuffain.

On October 21, 2022, the Internal Revenue Service (IRS) announced the updated contribution limits to retirement plans in Notice 2022-55. The new limits are valid beginning in tax year 2023. These limits are important, as they cap the tax benefits that can be realized from retirement plan savings contributions each year and are adjusted to account for annual inflation.

Employer Contribution Plan Limits

There are several options available under the ‘Employer Contribution Plans’ category. These plans are typically funded through an employer and may or may not have contributions paid for by the employer. For 401(k), 403(b), the federal government’s Thrift Savings Plan, and most 457 plans, the contribution limit will increase from $20,500 in 2022 to $22,500 in 2023.

Individuals aged 50 years and above can contribute additional funds, called ‘Catch Up Contributions.’ The catch-up contribution limit or the employer-sponsored plans mentioned above will increase from $6,500 in 2022 to $7,500 in 2023. This means those with a qualifying employer-sponsored plan who are 50 or older can contribute up to $30,000 to tax-beneficial retirement plans.

Individual Retirement Arrangement (IRA) Accounts

Depending on income, the IRS provides tax benefits to non-employer-sponsored retirement accounts called Individual Retirement Arrangements (IRAs). The traditional IRA offers a deduction for the income in the tax year the contribution is made, while a Roth IRA offers tax benefits when the funds are withdrawn after the qualifying retirement age.

The IRS has increased the contribution limit to these types of accounts to $6,500 in 2023 from $6,000 in 2022. For individuals eligible for a catch-up contribution, the additional contribution amount remains at $1,000.

Keep in mind that there is an income limit on both Traditional IRA and Roth IRA accounts before the tax benefits start to phase out. These limits are:

*Note: Contribution limits to Traditional IRA and Roth IRA accounts phase out over the noted income range.

Need assistance understanding the tax benefits and contribution limits attached to the different tax-beneficial retirement accounts? Our team of knowledgeable professionals is here to help. Give us a call to discuss your tax strategy for retirement savings today.

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