On August 25, 2023, the IRS issued Notice 2023-62, which establishes an administrative transition period—in effect, a two-year delay—for defined contribution (DC) plans to implement the new Roth catch-up contribution requirement under Section 603 of the SECURE 2.0 Act of 2022 (SECURE 2.0). With this transition period, plans now have until December 31, 2025, to make the necessary changes to their administrative and payroll systems to comply with the new requirement that takes effect January 1, 2026.

Required Roth catch-up contributions

Section 603 of SECURE 2.0 requires plan sponsors of 401(k), 403(b), and governmental 457(b) plans that permit Roth and catch-up contributions to accept only catch-up contributions designated as Roth contributions for certain eligible participants. For this purpose, eligible participants are those who reach age 50 by the end of the taxable year and whose FICA wages—that is, wages for purposes of the Federal Insurance Contributions Act (FICA) as defined in IRC section 3121(a)—from the employer sponsoring the plan exceed $145,000 in the prior calendar year, indexed for inflation. The new rule is effective for taxable years beginning after December 31, 2023.

In addition:

• Plans that do not offer catch-up contributions are not required to add catch-up contributions.
• Participants age 50 or older earning less than $145,000 in the prior year may make catch-up contributions either on a pre-tax or Roth basis.

Catch-up contributions for taxable years after December 31, 2023

A drafting error in SECURE 2.0 inadvertently eliminated catch-up contributions after 2023. However, a letter of Congressional intent was sent to the Treasury Department and IRS in May confirming that catch-up contributions should continue after 2023 and that Congress intends to introduce technical corrections legislation to fix the statutory language.

Consistent with Congressional intent, the Notice provides that plans can continue to accept catch-up contributions for taxable years after December 31, 2023, as long as the eligible participant’s elective deferrals and catch-up contributions are below the applicable elective deferral limit (projected to be $23,000 for 2024) and catch-up contribution limit (projected to be $7,500 for 2024).

Elective deferrals under multiple plans in the same year

Elective deferrals made by an individual to multiple plans in the same year must be aggregated when determining whether they have exceeded the applicable elective deferral and catch-up contribution limits noted above.

Transition period

The IRS specifies the first two taxable years after December 31, 2023, as the administrative transition period for plans to implement the new Roth catch-up contribution requirement. Therefore, from January 1, 2024, through December 31, 2025:¹

• Catch-up contributions for eligible participants with FICA wages above $145,000 in the prior calendar year will be treated as satisfying the new requirement even if they are not designated as Roth contributions, and
• A plan that does not provide for designated Roth contributions will be treated as satisfying the new requirement.

Additional guidance expected

The Treasury Department and IRS intend to issue further guidance on Section 603 of SECURE 2.0, after consideration of any comments received, addressing the following items:

• Guidance clarifying that individuals who do not earn FICA wages in the previous calendar year from the employer sponsoring the plan would not be subject to the Roth catch-up contribution requirement (for example, a partner or other self-employed individual receiving self-employment income, or certain state or local government employees).
• Guidance that permits plan sponsors to treat an election by an eligible participant to make catch-up contributions on a pre-tax basis as an election to make such contributions on a Roth basis.
• Guidance that a participant’s FICA wages from multiple employers participating in the same plan (including a multiemployer plan) would not be aggregated for purposes of determining whether the $145,000 limit is exceeded for a year. So, if a participant’s FICA wages exceeded $145,000 for employer A but not employer B in the previous calendar year, catch-up contributions made with employer B would not be required to be on a Roth basis.

In addition to the three items above, the Treasury Department and IRS are asking for comments on whether guidance is needed in the case where a plan offers catch-up contributions but does not currently permit Roth contributions. In this case, they ask whether the guidance should allow for such plans to permit catch-up contributions for participants age 50 or older whose FICA wages do not exceed $145,000, but not allow catch-up contributions for eligible participants whose FICA wages exceed that amount.

Comments to the Treasury Department and IRS on Section 603 must be submitted in writing by October 24, 2023.

Please contact your Milliman consultant for advice on how these provisions may impact your plan(s).

¹ For most individuals, the taxable year is the calendar year. If it is not, the applicable two-year period is from the taxable year beginning after December 31, 2023, until the taxable year beginning after December 31, 2025.