Tax changes coming for certain catch-up contributions, but IRS allows extra prep time

IRS has given employers two extra years to implement a Secure 2.0 Act provision that’s bringing tax changes for certain retirement plan catch-up contributions.

Section 603 of the Secure 2.0 Act says that if employees whose wages exceed $145K in the preceding year want to make catch-up contributions to their employer-sponsored retirement plan, the contributions will need to be made to Roth accounts.

In other words, a pre-tax deduction will no longer be an option for these high-wage-earning workers age 50 and over for any catch-up contributions. That’s a game changer for employees and employers alike.

The Secure 2.0 Act didn’t have any prep time built into it, to deal with the so-called Rothification provision. That caused many industry groups to ask IRS for relief.

Now, in new guidance, IRS provided a two-year administrative transition period.

So, instead of needing to be up and running by January 1, 2024, employers have until January 1, 2026.

Tax implications

In Notice 2023-62, IRS not only provided additional time but also stated it’s considering issuing further guidance on Section 603.

That guidance is expected to cover three topics which will help employers understand the tax implications of the new law:

1. Employees who don’t earn FICA wages. For example, some state or local government employees don’t earn FICA wages. Therefore, IRS may issue guidance that clarifies the Section 603 requirements don’t apply to them, even if they’re high-wage earners.
2. The treatment of pre-tax elections. The current thinking from IRS is this: If an employee who’s subject to the Section 603 rules elected to make catch-up contributions on a pre-tax basis, the plan administrator and employer would be able to treat that as an election to make catch-up contributions on a Roth basis. Again, look for official IRS guidance on this down the road.
3. Multi-employer plans. IRS may also release guidance explaining that the wages from one participating employer wouldn’t need to be aggregated with wages from another participating employer in the case of a multi-employer plan.

IRS is seeking comments on these and other topics that may warrant guidance. The deadline for comments is October 24, 2023.