IRS delays Roth catch-up contribution rule until 2026

The IRS recently issued transition relief (Notice 2023-62) that essentially delays for two years the effective date of a new provision that would have required all catch-up contributions to be made on a Roth basis for employees with wages exceeding $145,000.

The new Roth catch-up contribution rule was recently added by the second iteration of the Setting Every Community Up for Retirement Enhancement Act (the SECURE 2.0 Act), which was enacted on Dec. 29, 2022. As originally enacted, the new Roth catch-up contribution rule was scheduled to become effective for tax years beginning after 2023.

Catch-up contributions are additional elective deferrals that participants who are age 50 or older can make to certain tax-favored retirement plans (e.g., 401(k), 403(b) and governmental 457(b) plans) in excess of the otherwise applicable limits. The amount of catch-up contributions is indexed for inflation and reached $7,500 in 2023.

Before SECURE 2.0, catch-up contributions could be made on a pre-tax or Roth basis (if permitted by the plan sponsor), and all eligible participants under the plan generally had to be allowed to make the same elections with respect to catch-up contributions. SECURE 2.0 made a number of changes to the catch-up contribution rules, including to require catch-up contributions for participants whose wages for the preceding calendar year from the employer exceeded $145,000 (indexed for inflation) to be made on a Roth basis. In addition, SECURE 2.0 provides that, if a plan allows an eligible participant who is subject to the new Roth catch-up contribution rule to make catch-up contributions on a Roth basis, then all other eligible participants in the plan who are not subject to the new rule must be permitted to make catch-up contributions on either a pre-tax or Roth basis. These two changes are collectively referred to as the “new Roth catch-up contribution rule.”

The IRS new guidance delays the effective date of the new Roth catch-up contribution rule for two years until 2026. The IRS explained that they were addressing taxpayer concerns with being able to timely implement the new Roth catch-up contribution rule, and the two-year delay is intended to facilitate an orderly transition for compliance with the new rule.  

The notice also clarifies that catch-up contributions (pre-tax or Roth) can continue to be made for tax years beginning after 2023. There was a potential drafting error in the SECURE 2.0 Act which raised questions about whether the legislative language technically eliminated all catch-up contributions (pre-tax and Roth) beginning in 2024, and, if so, whether the drafting error could be addressed administratively by the IRS or required a technical correction through new legislation. Although the IRS does not expressly address in the notice, it appears from the IRS’s general discussion of the clarification that it is taking the position that no further legislative fix is required and the authority for making catch-up contributions extends beyond the two-year transition relief period otherwise provided by the notice.   

In addition, the notice indicates that the IRS intends to issue further guidance regarding the new Roth catch-up contribution rule when it goes into effect in 2026, including the following:

• The new rule would not apply to participants who do not have any wages as defined for FICA tax purposes for the preceding tax year – for example, a participant who was a partner or other self-employed individual of the employer in the preceding year.
• The employer would be permitted to treat an election by a participant subject to the new rule to make catch-up contributions on a pre-tax basis as an election by the participant to make catch-up contributions on a Roth basis.
• In the case of a plan maintained by more than one employer (including a multi-employer plan), a participant’s wages for the preceding calendar year from one participating employer would not be aggregated with the wages from another participating employer for purposes of determining whether the participant’s wages for the tax year exceeded $145,000 (indexed for inflation).

Next steps

Under the guidance, plan sponsors can continue to offer all employees the ability to make catch-up contributions on a pre-tax or a Roth basis for 2024 and 2025 in accordance with the pre-SECURE 2.0 rules. In anticipation of the original 2024 effective date, many plan sponsors may have already analyzed the impact and began taking steps to comply with the new rule, but this will now not be required until 2026. Plan sponsors should anticipate in the coming months further comprehensive guidance on the implementation of the new Roth catch-up contribution rule in 2026. Individuals with wages exceeding $145,000 should consider the impact of the change in rules in 2026 on their retirement savings strategies.