Background

SECURE 2.0 limits participants who had FICA wages from their employer greater than $145,000 (indexed) for the prior year to making catch-up contributions only in the form of a Roth deferral. Other participants could continue to choose between making catch-up contributions as a pre-tax deferral or a Roth deferral. “Catch-up” contributions are additional deferrals that employees who have attained at least the age of 50 during the year may make.

Plan sponsors quickly identified serious administrative concerns with implementing the change by January 1, 2024. Many plans do not allow for Roth contributions. Adding Roth contributions could require collective bargaining or a legislative session. In addition, because of the FICA income limit, coordination between payroll administrators and pension recordkeepers is needed. For multiemployer plans and multiple-employer plans, there is a lack of clarity as to who is the employer. Governmental plans must have any amendments approved by the legislature or other governing body.

The new guidance

In recognition of the problems, the IRS issued Notice 2023-62, which delays enforcement of the provision until January 1, 2026.

Notice 2023-62 also clarifies a concern that SECURE 2.0 inadvertently deleted all catch-up contributions; the IRS confirmed that catch-up contributions were not eliminated.

Request for comments

The IRS has asked for comments on three positions it anticipates adopting:

• A tight interpretation of FICA wages so that those without FICA wages, such as partners, sole proprietors and some governmental employees, would not be restricted
• A definition of “employer” in the multiemployer and multiple-employer plan context so that the prohibition applies on an employer-by-employer basis and not on the basis of all employers in the plan
• A rule treating an election by a participant with FICA wages above the threshold to make catch-up contributions on a pre-tax basis as an election by the participant to make catch-up contributions that will be treated as designated Roth contributions

The IRS has also asked whether the guidance should make an exception to the rule that elective contributions must be available to all participants if available to one — the “universality” rule. Creating an exception would allow a plan that does not allow for Roth contributions for any participant currently to provide a Roth option only for participants with FICA wages greater than $145,000.

Next steps

Plan sponsors should not wait until 2025 to work out issues and logistics that can be addressed now. These are mainly the administrative and employment tax issues necessary for the payroll staff and the recordkeeper to coordinate.