The Internal Revenue Service (IRS) has issued Notice 2023-62, which gives guidance on Section 603 of the SECURE 2.0 Act concerning catch-up contributions. The Notice delays the requirement in Section 603 for highly compensated individuals to make catch-up contributions on a Roth basis – with no pre-tax option – to qualified retirement plans effective January 1, 2024. Instead, the Notice establishes a two-year administrative transition period, during which all catch-up contributions by these individuals will satisfy the terms of Section 603, whether they are made on a Roth basis or not.
Section 603 requires plan participants whose prior year wages were more than $145,000 (as adjusted for cost-of-living in future years), to make catch-up contributions on a Roth basis. This requirement applies to all plans qualified under Internal Revenue Code (Code) Section 401(a). These plans include 401(k), 403(b), and 457(b) plans. Section 603 has an effective date of January 1, 2024. Section 603 also inadvertently amends a section of the Code that can be construed as eliminating the ability to make catch-up contributions.
Plan sponsors have raised numerous concerns about the administration of SECURE 2.0, including Section 603 and its rapidly approaching effective date. As a result, the IRS issued Notice 2023-62. First, the Notice clarifies that Section 603 does not prohibit catch-up contributions despite the inadvertent amendment to a certain Code section. Next, the Notice effectively delays implementation of Section 603 until January 1, 2026, establishing a two-year transition period. During this administrative transition period, the affected individuals may make catch-up contributions in any manner. In other words, they are not restricted to making catch-up contributions on a Roth basis.
The Notice also states that the IRS intends to issue further guidance on Section 603. More specifically, the IRS will provide guidance clarifying the following issues:
- Section 603 would not apply to a plan participant who had no wages from the employer sponsoring the plan in the immediately preceding year;
- Employers may treat an employee with a pre-tax election as having a Roth deferral election for catch-up contributions under Section 603; and
- The methodology by which a plan should determine a plan participant’s wages in light of multiple employer and multiemployer plans.
The IRS has also requested comments on the Notice, so its final guidance may address or clarify more issues than those listed above.
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