IRS issues guidance on new retirement catch-up contribution rules – part one

New catch-up contribution rules for tax-favored retirement planThe SECURE 2.0 Act was signed into law by President Biden in December 2022. The expansive new law significantly altered so-called catch-up payments, among other things, with repercussions for employers and employees. Many retirement plan sponsors have been finding it challenging to implement the appropriate processes and procedures to comply with the new retirement catch-up contribution rules set to take effect after 2023. Notice 2023-62 from the IRS recently offered solace in response to taxpayer worries. 

New retirement catch-up contribution rules

Under the tax law, individuals 50 or older may make catch-up contributions to 401(k) plans and other retirement accounts. Each year, the allowable amount increases to account for inflation. You can contribute an extra $7,500 in 2023 over the current yearly 401(k) contribution cap of $22,500. Regardless of the income level of the taxpayer, the donations are permitted.

All eligible taxpayers can currently select between making their contributions on a pre-tax basis and a Roth after-tax basis (providing their employer accepts the Roth option). However, under SECURE 2.0’s Section 603, any catch-up contributions made by higher-income participants in 401(k), 403(b), or 457(b) retirement plans must be Roth after-tax contributions.

Higher-income participants are individuals whose prior-year Social Security earnings were more significant than $145,000. The ceiling will rise to account for inflation. A plan must also permit other members who are 50 years old or older to make their catch-up contributions on an after-tax Roth basis if it permits higher-income participants to do so. According to the statute, these regulations will take effect for tax years starting after December 31, 2023.

Because of numerous administrative challenges, plan sponsors and payroll service providers were concerned about the impending effective date. As an illustration, sponsors must create procedures to identify higher-income plan participants — they often haven’t needed to figure out how much their employees make in Social Security benefits before — and give that information to their plan administrators. Additionally, sponsors must implement mechanisms to limit catch-up contributions to Roth contributions and inform their employees of the changes.

Employers without Roth contribution options in their typical retirement plans face even more difficulties. They must decide whether to eliminate catch-up contribution eligibility for all employees or change their plans to allow such contributions, which can take months to process and execute.

Employers and employees must not delay

It’s excellent news for companies and employees that the IRS has extended the deadline for implementing the Section 603 regulations. However, there is an emphasis on implementing the necessary changes to attain compliance, which would take some time and effort. Sponsors of plans should get going as soon as possible. Do not hesitate to contact RRBB Advisors with any questions. In the meantime, keep an eye out for part two of this blog post for more information!

© 2023


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