Working Together

note:  notice 2023-62 issued on august 25, 2023 delays the effective date of changes to age 50 catch-up contributions until 2026.

Section 401(k) Plans, Section 403(b) Plans and governmental Section 457(b) Plans generally permit employees to defer compensation on a pre-tax basis. These plans may also provide the opportunity for employees to defer compensation on a Roth (after-tax) basis which, if certain conditions are met, will permit the earnings on these Roth deferrals to be tax-free when distributed from the plan. These plans may also provide participants who are age 50 or older with the opportunity to make contributions in excess of the regular deferral limit (“Age 50 Catch-Up Contributions”). Age 50 Catch-up Contributions are made on a pre-tax basis but may be made on a Roth basis if the plan permits Roth deferrals.

The SECURE 2.0 Act[1] requires certain participants eligible to make Age 50 Catch-Up Contributions to make those contributions on a Roth basis starting January 1, 2024. Specifically, in 2024 employees whose wages exceeded $145,000 in 2023 may make Age 50 Catch-Up Contributions only as Roth salary deferrals.[2] Without further guidance, plans without a current Roth feature will need to be amended to either add that feature, or to eliminate Age 50 Catch-Up Contributions. 

A strong coalition of plan sponsors, recordkeepers, payroll providers, and retirement plan advisors have asked Congress to delay the effective date of these new rules for two years, due to anticipated implementation problems. In their July 14, 2023 letter to Congress the signers assert that if the rules are not delayed, many plan sponsors will eliminate all Age 50 Catch-Up Contributions in order to keep their plans compliant.

There is particular concern about the ability of payroll companies and plan recordkeepers to update and coordinate their systems by the January 1, 2024 deadline. One coordination problem is the time for determining which participants are subject to the Roth Age 50 Catch-Up Contribution requirement. An employer may not know on January 1^st which employees earned more than $145,000 in 2023. Another concern is which deferrals are subject to the Roth Age 50 Catch-Up Contribution requirement. Some plans permit regular deferrals and Age 50 Catch-Up Contributions to be made at the same time while others only treat deferrals as Age 50 Catch-Up Contributions once the regular deferral maximum amount is reached. Multiple sources indicate that the Treasury Department is aware of these problems and that guidance, including a possible delay, may be in the works.

What is a Plan Sponsor to do? If you sponsor a Section 401(k), 403(b), or governmental 457(b) plan, you should ask your plan recordkeeper and your payroll provider whether they will be in a position to implement the mandatory Roth Age 50 Catch-Up Contributions requirements on January 1, 2024. Whatever the answer, you should consult with your plan’s legal advisor about your options for keeping your plan tax-compliant in 2024.

If you have any questions concerning the mandatory treatment of certain participant’s Age 50 Catch-Up Contributions, please contact any member of our Employee Benefits practice group.

[1] SECURE 2.0 Act of 2022 (SECURE 2.0), enacted on December 29, 2022, as part of the Consolidated Appropriations Act of 2023

[2] The $145,000 amount is subject to annual cost of living increases. The amount is based on wages earned in the preceding calendar year.