Recent changes in IRS rules could significantly impact ‘catch-up contributions’ to retirement plans for those aged 50 and up. Our guide breaks down the new guidelines under SECURE 2.0 and what they mean for your retirement planning.

In late–August 2023, the Internal Revenue Service announced that they have delayed a mandatory requirement regarding Roth 401(k) catch-up contributions that was originally established under the SECURE Act 2.0.

Since SECURE 2.0 is itself somewhat new, this announcement may be confusing for some of your staff members (and perhaps for you, as well). Here’s what you need to know.

Original Rules for Catch-Up Contributions Before SECURE 2.0

Before SECURE 2.0, an individual age 50 and up was allowed to make pre-tax catch–up contributions (extra amounts allowed beyond the standard contribution limits) to their company’s retirement plan.

Changes Brought by SECURE 2.0: Impact on High-Earners

After SECURE 2.0 – which President Biden signed into law on December 29, 2022 – that tax break was scheduled to be eliminated for “high-earners” (with wages exceeding $145,000).

As of January 1, 2024, any catch-up contributions these employees made to a 401(k), 403(b) or governmental 457(b) plan would be designated as Roth (i.e., post-tax) contributions.

IRS Notice 2023-62 and Catch-Up Contributions

On August 25, 2023, the IRS issued Notice 2023-62, an administrative transition period that will delay the enforcement of the Roth catch-up contribution requirement until January 1, 2026. This will give those impacted by the mandatory rule an additional two years to comply.

The IRS has also clarified that plan participants who are age 50 and over can continue to make catchup contributions beyond 2023, regardless of income.

According to the IRS, this administrative transition period will help taxpayers transition smoothly to the new Roth catch-up requirement and is designed to facilitate an orderly transition for compliance with that requirement.

The notice also clarifies that the SECURE 2.0 Act does not prohibit plans from permitting catch-up contributions, so plan participants who are age 50 and over can still make catch-up contributions after 2023.

Future Guidance on Catch-Up Contributions

The Treasury Department and the IRS say that will be issuing future guidance to help taxpayers, and the notice describes several positions that are expected to be included.

As with most IRS announcements, the rules can be complex. Be sure to get competent advice to make sure you understand how this change may affect you.

Want to learn more about the new IRS catch-up rule, SECURE 2.0 or other retirement/benefits-related issues? Contact Accu Data today. We’re happy to answer any questions you have!