The saga of 401(k) catch-up contributions under SECURE 2.0 is well known. Beginning with catch-up contributions to be made next year, employees whose Social Security wages (W-2, Box 3 wages) exceed $145,000 this year can make catch-up contributions on a Roth, after-tax basis only.
And then there’s the teeny, tiny glitch of Congress dropping the section of the tax code allowing any catch-up contributions.
Most tax pros agree this glitch is for Congress to fix, not the IRS. The problem: Legislation could come too late for catch-up contributions, beginning Jan. 1, 2024.
But the glitch, at least temporarily, has been solved by the IRS.
Go ahead, make your catch-up contributions
Congress’ deadlines for the IRS are often unrealistic, in which case it acts on its own. Including Congress’ little goof-up, this appears to be the case here.
Explicit in the IRS’ guidance, which it issued last Friday afternoon, it’s not waiting for Congress. This is good news for employees who make catch-up contributions.
IRS: The section of the tax code eliminating all catch-up contributions doesn’t change the result for taxable years beginning after Dec. 31, 2023.
In addition, the IRS is applying a two-year administrative transition period to SECURE’s Roth catch-up contribution provision. Specifically, until taxable years beginning after Dec. 31, 2025:
Catch-up contributions will be treated as satisfying the Roth, after-tax requirement, even if employees’ contributions aren’t designated as Roth contributions.
A plan that doesn’t currently provide for designated Roth contributions will be treated as satisfying the Roth, after-tax requirements.
This is good news for Payroll, which can postpone tracking employees’ salaries and reworking the payroll software; Benefits, which is probably in the process of making conforming amendments to the 401(k) plan; and employees, who can continue to make catch-up contributions on a pretax basis.
The IRS needs your help
The IRS also stressed it will be issuing more guidance on this section of SECURE.
So it wants your input on the following:
For employees who will be subject to the Roth, after-tax catch-up provision, whether guidance should allow the plan administrator or employer to designate a pretax contribution as a Roth, after-tax contribution. Existing rules allow this if the designation is made at the time of the cash or deferred election.
For employees who contribute to more than one 401(k) plan during a year—an old employer’s plan and a new employer’s plan, for example—contributions into each plan would be treated separately for purposes of determining whether the $145,000 threshold has been reached. This separate treatment would allow employees to make pretax catch-up contributions into their new plans, even though they were subject to the Roth, after-tax provision in their old plans.
Whether 401(k) plans will be considered discriminatory if they allow employees whose Social Security wages don’t exceed $145,000 to make pretax catch-up contributions, while not allowing employees whose Social Security wages exceed $145,000 to make catch-up contributions.
Comments should be submitted in writing on or before Oct. 24, 2023, and should reference Notice 2023-62. Comments may be submitted electronically via the Federal eRulemaking Portal; type “IRS-2023-0039” in the search field on the Regulations.gov home page to find the IRS’ notice and submit comments.
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