One of the provisions proving most challenging for 401(k) plans under the SECURE Act 2.0 — the retirement plan reform included in the 2022 year-end funding bill — has been implementation of the Roth catch-up requirement for high earners.
As a reminder, catch-up contributions are elective deferrals made by a participant age 50 or older that exceeds the standard plan limit (often linked to the annually indexed statutory limit - $22,500 for 2023). Catch-up contributions generally improve retirement security for older workers by allowing increased savings as they approach retirement.
Under the Secure Act 2.0, participants age 50 and older who earned more than $145,000 in the preceding year are still eligible to make catch-up contributions, but are generally required to make their catch-up contributions on a Roth (special post-tax) basis. This provision was slated to become effective January 1, 2024.
A large lobbying effort has ensued seeking a delay in the effective date due to the administrative updates and system changes needed to implement these Roth catch-up requirements. Certain plan sponsors were even considering discontinuing all catch-up contributions given the inability to timely and accurately comply with the law. Responding to these comments and efforts, the has IRS announced a two-year transition period to allow additional time to come into compliance.
The transition period is temporary and not all-encompassing. Plan sponsors should consider if any communications have already gone out that reference this Roth catch-up rule and now require modification. In addition, plan sponsors should continue to work with their service providers and counsel to determine what is required to remain in compliance with SECURE Act 1.0 and 2.0.