IRS delays Roth workplace retirement plan catch-up requirement to 2026

8 months ago 205

Relax! An IRS change should help those 50 and older who make catch-up contributions to their workplace retirement savings plans. (Photo: Unsplash+ in collaboration with Getty Images)

The second version of the Setting Every Community Up for Retirement Enhancement, or SECURE 2.0, Act was lauded for its many retirement-saving positive provisions.

But as often happens with tax-related legislation, especially when it becomes law at the very end of a year, there were some not so good changes.

That was the case with SECURE 2.0, which was enacted on Dec. 29, 2022, as part of the much larger Consolidated Appropriations Act.

One of the problematic provisions was a requirement that higher-income employees' catch-up contributions to their workplace retirement plans be made with after-tax dollars. That was supposed to happen on Jan. 1, 2024.

But on Friday, Aug. 25, the Internal Revenue Service decided to give those workers and their companies more time to comply with the mandate. The Roth catch-up's new effective date won't apply until 2026.

Plus, the IRS clarified in Notice 2023-62 that workplace plan participants age 50 and older can continue to make catch‑up contributions after 2023, no matter what their income level is.

Regular vs. Roth workplace plans: The Roth workplace retirement plan problem was discovered once retirement and tax professionals began going through the new law's provisions.

They found that the SECURE 2.0's required effective date for the Roth contributions, which applies to employees who earned more than $145,000 in the preceding year from the current employer, could deprive those older workers of the option to make catch-up contributions.

A major problem is that many workplaces that offer regular plans, including private sector 401(k)s and similar 403(b) nonprofit organization and 457(b) governmental plans, do not offer Roth versions.

A Roth 401(k) et al workplace account works like a Roth IRA.

As with IRAs, employee contributions to a traditional 401(k) et al plan aren't taxed when they are made. They grow tax-deferred until withdrawal, when they are taxed as ordinary income.

With a Roth 401(k) and its savings cousins, worker contributions are taxed before they go into the plans, just like with a Roth IRA. The benefit for workers is that their eventual workplace Roth 401(k) withdrawals are tax-free.

Timely transition problems: Since employee money is involved, and the tax code affects these plans, companies must meet specific rules in order for their plans to be designated by the IRS as qualified. Changes done in accordance with those rules cannot be completed immediately.

"[S]ystems do not exist – and certainly cannot be built in 2023 – to instantly coordinate payroll systems (which determine who earned over $145,000 in the prior year) with plan recordkeeper systems that must ensure compliance with the new catchup rule," wrote the American Benefits Council and National Association of Government Defined Contribution Administrators (NAGDCA) in a July 14 letter to the chairs and ranking minority members on the House Ways and Means and Senate Finance Committees and copied to Treasury Secretary Janet Yellen.

"These circumstances pose a long list of other obstacles including, for many plans, the challenges of adding a Roth feature and communicating that feature to participants, as well as special challenges for state and local governments and collectively bargained plans," continued the lobbying groups' letter, which also was co-signed by more than 225 employers with workplace plans.

Simply put, they argued, there is not enough time for plans without the Roth option to put it in place by Jan. 1, 2024.

If the new year implement date remains, it would effectively and unintentionally result in the elimination of catch-up contributions for many workers, the groups wrote to Capitol Hill leaders.

Instead, they asked that Congress change the law to allow more time — specifically, a two-year delay — or, as an alternative, that Treasury and the IRS use their administrative authority to unilaterally provide the necessary relief.

That second administrative relief option is what is detailed in IRS Notice 2023-62, which earns not only this week's By the Numbers recognition, but the expected plaudits of both the American Benefits Council and NAGDCA.

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