In late 2022, Congress passed the SECURE Act 2.0, which, along with other items, introduced a new rule requiring that catch-up contributions made by highly compensated employees be made on a Roth after-tax basis only. Less than one year later, and only a few months before this new rule was to go into effect, the IRS issued Notice 2023-62, which provides highly anticipated transition relief for the Roth catch-up contribution rule by extending the compliance period by two years.
What is a highly compensated employee?
A highly compensated employee (HCE) is a participant with more than $145,000 in prior year FICA wages.
What are catch-up contributions?
Catch-up contributions are permitted extra contributions to 401(k) plans for participants ages 50 or older in the plan year. Catch-up contributions are limited to $7,500 above the $22,500 employee deferral limit for 2023.
Seems simple enough; what is the problem?
This rule was originally effective January 1, 2024, however, many commenters noted significant administrative hurdles that would be required for implementation. First, plan sponsors and recordkeepers do not currently have systems in place to 1) identify HCEs on a routine basis or 2) limit HCEs from making catch-up contributions on a Roth after-tax basis only. Additionally, plans that do not already have a Roth contribution feature had to choose between adding a Roth contribution feature or removing catch-up contributions altogether.
Notice 2023-62 provides a two-year administrative transition period in which plan sponsors may continue to allow pre-tax catch-up contributions made by HCEs until December 31, 2025. During this time, the IRS expects to issue further guidance to help with administration of the new rule. Additionally, Notice 2023-62 clarifies that an assumed error in drafting of the SECURE Act 2.0 which allegedly eliminated catch-up contributions altogether does not do so, and catch-up contributions remain available to plan sponsors who choose to offer them.