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The SECURE Act 2.0 was signed into law at the end of last year. Building on many reforms implemented in the original SECURE Act of 2019, the legislation calls for a myriad of updates impacting employer-sponsored retirement plans. It included changes to plan eligibility, retirement saving opportunities, and adjustments to operations. Examples include automatic enrollment, an increase in the age when Required Minimum Distributions (RMDs) need to be taken, and student loan matching. The legislation contains dozens of provisions with effective dates in 2024, 2025, 2026, and beyond.
There was also a change affecting catch-up contributions for participants whose prior-year Social Security wages exceeded $145,000. Starting in 2024, these contributions are required to be treated as having been made on an after-tax or ROTH basis (Section 603), rather than the pre-tax basis used by many plans. The short timeline for compliance caused concern amongst many companies, which needed more time to make the required change. In late August, the IRS issued Notice 2023-62, which provides a two-year administrative transition period to comply with the requirement. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.
What Did Section 603 Change?
Plan participants are limited to the amount that may be contributed to a plan by limits established each year. Yet, for participants 50 years or older, there is the option to contribute an additional amount known as a catch-up contribution. These special contributions can be made on a pre-tax or Roth basis, depending on the plan’s specific rules. SECURE Act 2.0 changed this rule to require all catch-up contributions to a qualified retirement plan, effective for years after December 31, 2023, to be subject to Roth treatment for those whose prior-year Social Security wages exceeded $145,000.
The transitional guidance makes important changes designed to alleviate plan sponsor concerns about not having adequate time to comply with Section 603, including:
- Administrative Extension Period – Recognizing the hardship and significant expense of meeting the original deadline, the guidance provides a two-year administrative extension period. This means that until January 1, 2026, catch-up contributions will be considered to have satisfied the requirement even if not made on a Roth basis. It also means that plans without Roth features can continue to allow participants to make catch-up contributions.
- Catch-Up Contributions After 2023 – It was confirmed that the SECURE Act 2.0 does not prevent plan sponsors from allowing catch-up contributions. So, plan participants who are age 50 and over can still make catch-up contributions after 2023.
The agency is expected to issue additional guidance after the initial comment period concludes. It is expected to include details on when an employer would be permitted to treat an election by the participant to make catch-up contributions on a pre-tax basis as an election to make catch-up contributions on a Roth basis.
The recently released guidance provides welcome relief to plan sponsors struggling to meet the original deadline. While the transitional period is helpful, it is important to carefully consider the plan changes that need to be made to comply with Section 603. If you have questions about the information outlined above or need assistance with your next benefit plan audit, JLK Rosenberger can help. For additional information, call 818-334-8646 or click here to contact us. We look forward to speaking with you soon.