On August 25, 2023, employers, employees and ERISA attorneys all over the nation breathed a collective sigh of relief after the IRS announced that it would provide a two-year “administrative transition” period for employers and plan administrators to coordinate and prepare for the implementation of the new Roth catch-up contribution rules expressed in SECURE Act 2.0.
By way of background, for people age 50 and older, the IRS allows additional pre-tax deferrals to their 401(k) of an annual amount in excess of the limit for those younger than 50 (“referred to as catch-up contributions”). SECURE Act 2.0 requires catch-up contributions on an after-tax (instead of pre-tax) basis for participants who earned more than $145,000 in the prior year.
Employers began calling for a grace period almost immediately upon the rule’s announcement, which requires employees whose wages were more than $145,000 in the previous year to make catch-up contributions on a Roth (after-tax) basis . Employers were scrambling to program their payroll systems to comply with the new rule to meet the January 1, 2024 effective date. In its announcement, the IRS stated that plans that do not already provide for designated Roth contributions will continue to be deemed to satisfy the requirements of this new section during the two year transition. The IRS also stated that it intends to issue additional guidance in the future.
Bottom Line: With the newly granted two-year administrative transition period, employers can continue to offer catch-up contributions on a pre-tax basis while they prepare their payroll systems to provide that catch-up contributions must be made on a Roth (after-tax) basis for employees with incomes higher than $145,000.
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