One of the modifications introduced by the SECURE 2.0 Act was the stipulation that, starting in 2024, catch-up contributions to employer retirement plans for certain high-earning individuals must be made to designated Roth accounts within the retirement plan. Additionally, there was apprehension that this amendment might have unintentionally eliminated the option for individuals at all income levels to make such catch-up contributions. Notice 2023-62[1] from the IRS offers interim guidance and relief concerning these provisions.

General Description of the Notice

The IRS promptly highlights both the limited scope of the guidance provided in the Notice and the two-year delay in the implementation of the requirement.

This notice is not intended to provide comprehensive guidance as to section 603 of the SECURE 2.0 Act, but rather is intended to provide guidance on particular issues to assist in the implementation of that section. This notice also announces a 2-year administrative transition period with respect to the requirement under section 603 of the SECURE 2.0 Act that catch-up contributions made on behalf of certain eligible participants be designated as Roth contributions. The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) have been made aware of taxpayer concerns with being able to timely implement section 603 of the SECURE 2.0 Act. The administrative transition period described in this notice is intended to facilitate an orderly transition for compliance with that requirement.[2]

The IRS additionally indicates that the agency is continuing to work on more comprehensive guidance regarding this topic.

The Treasury Department and the IRS continue to work on implementation of section 603 of the SECURE 2.0 Act and intend to issue further guidance, as described in section V of this notice. The Treasury Department and the IRS invite comments on this notice and any other aspect of section 603 of the SECURE 2.0 Act.[3]

Background on the Requirements

The Notice describes the changes made by the SECURE 2.0 Act to the catch-up contribution rules for qualified retirement plans:

Section 603(a) of the SECURE 2.0 Act amends section 414(v) of the Code to add section 414(v)(7). Section 414(v)(7)(A) generally provides that, in the case of an eligible participant whose wages (as defined in section 3121(a)) for the preceding calendar year from the employer sponsoring the plan exceed $145,000 (as adjusted under section 414(v)(7)(E)), section 414(v)(1) applies only if any catch-up contributions are designated Roth contributions (as defined in section 402A(c)(1)) made pursuant to an employee election.[4]

If a plan aims to provide high-compensation employees with the option to make these deferrals to a designated Roth account, the SECURE 2.0 amendments stipulate that all other employees eligible for catch-up contributions must also be given the choice to use a designated Roth account for their own catch-up contributions.

Section 414(v)(7)(B) provides that, in the case of an applicable employer plan with respect to which section 414(v)(7)(A) applies to any participant for a plan year section 414(v)(1) does not apply to the plan unless the plan provides that any eligible participant may make catch-up contributions as designated Roth contributions. Thus, if a plan provides that an eligible participant who is subject to the requirements of section 414(v)(7)(A) may make catch-up contributions as designated Roth contributions, then all eligible participants in the plan must be permitted to make catch-up contributions as designated Roth contributions.[5]

The Notice clarifies that while this rule is applicable to qualified retirement plans permitting deferrals, it does not extend to catch-up contributions made to SIMPLE IRAs or any existing SARSEPs. Congress discontinued the ability for employers to establish new SARSEP programs in 1997.

Section 414(v)(7)(C) provides that section 414(v)(7)(A) does not apply in the case of an applicable employer plan described in section 414(v)(6)(A)(iv) (a SEP arrangement under section 408(k) or a SIMPLE IRA plan under section 408(p)). Thus, section 414(v)(7)(A) applies in the case of an applicable employer plan that is a qualified plan under section 401(a) (including a section 401(k) plan), a section 403(b) plan, or a section 457(b) plan maintained by an employer described in section 457(e)(1)(A) (an eligible governmental plan).[6]

But Can Anyone Make Standard Elective Deferrals After 2023

Concerns were raised regarding a conforming amendment in Section 603(b)(1) of the SECURE 2.0 Act. This amendment eliminated IRC §402(g)(1)(C) from the Internal Revenue Code for tax years beginning after December 31, 2023. Before its removal, that subsection read as follows:

(C) Catch-up contributions. In addition to subparagraph (A), in the case of an eligible participant (as defined in section 414(v)), gross income shall not include elective deferrals in excess of the applicable dollar amount under subparagraph (B) to the extent that the amount of such elective deferrals does not exceed the applicable dollar amount under section 414(v)(2)(B)(i) for the taxable year (without regard to the treatment of the elective deferrals by an applicable employer plan under section 414(v)).

With that provision removed from the Internal Revenue Code, many speculated that all catch-up contributions, even those not made to a designated Roth account, would ultimately be included in the participant’s taxable wages for the year of deferral. If that were the case, then for individuals earning below the $141,000 cap, directing catch-up contributions to a designated Roth account would become the only logical choice for a participant in a plan governed by these rules.

In the Notice, the IRS clarifies that this is not the outcome of the change in the IRC. Instead, catch-up contributions not allocated to a designated Roth account will continue to be excluded from the employee’s taxable wages for the year in which the deferral occurs.

Pursuant to section 414(v)(1), an applicable employer plan is not treated as failing to meet any requirement of the Code solely because the plan permits an eligible participant to make catch-up contributions under section 414(v) in any plan year. Accordingly, for taxable years beginning after December 31, 2023, an applicable employer plan may permit an eligible participant to make elective deferrals under the plan that exceed the applicable dollar amount under section 402(g)(1)(B) (or deferrals under the plan that exceed the applicable dollar amount under section 457(e)(15)) if those contributions in excess of the applicable dollar amount satisfy the requirements under section 414(v) for catch-up contributions. The elimination of section 402(g)(1)(C) of the Code under section 603(b)(1) of the SECURE 2.0 Act does not change this result for taxable years beginning after December 31, 2023.

If an eligible participant is subject to the requirements of section 414(v)(7)(A), then any catch-up contributions that are made to the plan on behalf of the participant must be designated as Roth contributions. However, if an eligible participant is not subject to the requirements of section 414(v)(7)(A), then any catch-up contributions that are made to the plan on behalf of the participant are not required to be designated as Roth contributions. In that case, any catch-up contributions under section 414(v) that are made to the plan on behalf of the participant that are not designated as Roth contributions are not includible in the participant’s gross income under section 402(g)(1)(A) (and do not exceed the limitation in section 457(b)(2)) because, in accordance with section 414(v)(3)(A)(i), the limitations on elective deferrals under sections 401(a)(30) and 403(b) (and the limitation on deferrals under section 457(b)(2)) do not apply to those catch-up contributions.[7]

The IRS justifies this ruling in a footnote by referring to proposed regulations the agency had issued prior to the enactment of IRC §402(g)(1)(C) in 2002.

Proposed regulations, which were issued before the enactment in 2002 of section 402(g)(1)(C), permitted catch-up contributions in excess of the applicable dollar amount under section 402(g)(1)(B) or 457(e)(15) for purposes of section 414(v). See proposed § 1.414(v)-1(a)(1) and (b)(1)(i), 66 FR 53555 (the 2001 NPRM).[8]

The Notice further states that the removal of IRC §402(g)(1)(C) does not affect the treatment of deferrals made to multiple plans.

If an individual makes elective deferrals to two or more plans during a taxable year (including plans maintained by unrelated employers), then, under section 402(g)(1)(A), those elective deferrals are aggregated for purposes of determining whether the amount of the individual’s elective deferrals exceeds the applicable dollar amount under section 402(g)(1)(B). Similarly, an eligible participant’s elective deferrals made to two or more plans during a taxable year are also aggregated for purposes of applying the limitation on the amount of catch-up contributions under section 414(v)(2). The elimination of section 402(g)(1)(C) of the Code under section 603(b)(1) of the SECURE 2.0 Act does not change this result for taxable years beginning after December 31, 2023.[9]

Once again, the IRS refers in a footnote to the same 2001 proposed regulations to support the agency’s stance that the repeal of IRC §402(g)(1)(C) has no impact on this issue.

Proposed § 1.414(v)-1(g) of the 2001 NPRM also provided for aggregation of an eligible participant’s elective deferrals made to two or more plans for purposes of section 414(v)(2).[10]

Administrative Delay in Applying Use of Designed Roth for Catch-Up Contributions by Higher Earners to 2026

While the resolution of the impact of the removal of IRC §402(g)(1)(C) will have the most significant long-term effect, what will likely attract immediate attention is the administrative delay of two years for the requirement that higher earners direct their catch-up contributions to designated Roth accounts.

The Notice outlines the following specifics regarding the administrative delay:

Under section 603(c) of the SECURE 2.0 Act, the provisions of section 603 apply to taxable years beginning after December 31, 2023. However, the first two taxable years beginning after December 31, 2023, will be regarded as an administrative transition period with respect to the requirement under section 414(v)(7)(A) of the Code that catch-up contributions made on behalf of certain eligible participants be designated as Roth contributions. Specifically, until taxable years beginning after December 31, 2025, (1) those catch-up contributions will be treated as satisfying the requirements of section 414(v)(7)(A), even if the contributions are not designated as Roth contributions, and (2) a plan that does not provide for designated Roth contributions will be treated as satisfying the requirements of section 414(v)(7)(B).[11]

[1] Notice 2023-62, August 25, 2023, https://www.irs.gov/pub/irs-drop/n-23-62.pdf (retrieved August 25, 2023)

[2] Notice 2023-62, August 25, 2023

[3] Notice 2023-62, August 25, 2023

[4] Notice 2023-62, August 25, 2023

[5] Notice 2023-62, August 25, 2023

[6] Notice 2023-62, August 25, 2023

[7] Notice 2023-62, August 25, 2023

[8] Notice 2023-62, August 25, 2023, Footnote 3

[9] Notice 2023-62, August 25, 2023

[10] Notice 2023-62, August 25, 2023, Footnote 4

[11] Notice 2023-62, August 25, 2023