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IRS Delays Effective Date of SECURE 2.0 Act Roth Catchup Provision Two Years
(Parker Tax Publishing September 2023)
The IRS provided guidance with respect to Code Sec. 603 of the SECURE 2.0 Act (Pub. L. 117-328), which among other changes, requires that for certain eligible participants catch-up contributions under Code Sec. 414(v)(1) must be designated as Roth contributions pursuant to an employee election. In addition, the IRS announced that although Section 603 of the SECURE 2.0 Act applies to tax years beginning after December 31, 2023, years 2024 and 2025 will be regarded as an administrative transition period and therefore, catch-up contributions made on behalf of certain eligible participants during those years will be treated as satisfying the requirements of Code Sec. 414(v)(7)(A) even if they are not designated as Roth contributions. Notice 2023-62.
Background
Code Sec. 414(v)(1) provides that an applicable employer plan (as defined in Code Sec. 414(v)(6)(A)) will not be treated as failing to meet any requirement of the Code solely because the plan permits an eligible participant (as defined in Code Sec. 414(v)(5)) to make additional elective deferrals under Code Sec. 414(v) (catch-up contributions) in any plan year. Code Sec. 414(v)(3)(A)(i) further provides that a catch-up contribution is not, with respect to the year in which the contribution is made, subject to any otherwise applicable limitation contained in Code Sec. 401(a)(30) (that is, the limitation on the exclusion of elective deferrals from gross income under Code Secs. 402(g)(1)(A)), 403(b) (including the requirement under Code Sec. 403(b)(1)(E) that a contract purchased under a salary reduction agreement satisfy the requirements of Code Sec. 401(a)(30)), or Code Sec. 457(b)(2) (determined without regard to Code Sec. 457(b)(3)), among other provisions.
Section 603(a) of the SECURE 2.0 Act, enacted as part of the Consolidated Appropriations Act, 2023 (Pub. L. 117-328), amended Code Sec. 414(v) to add Code Sec. 414(v)(7). Code Sec. 414(v)(7)(A) generally provides that, in the case of an eligible participant whose wages (as defined in Code Sec. 3121(a)) for the preceding calendar year from the employer sponsoring the plan exceed $145,000 (as adjusted under Code Sec. 414(v)(7)(E)), Code Sec. 414(v)(1) applies only if any catch-up contributions are designated Roth contributions (as defined in Code Sec. 402A(c)(1)) made pursuant to an employee election.
Code Sec. 414(v)(7)(B) provides that, in the case of an applicable employer plan with respect to which Code Sec. 414(v)(7)(A) applies to any participant for a plan year, Code Sec. 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 Code Sec. 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.
Code Sec. 414(v)(7)(C) provides that Code Sec. 414(v)(7)(A) does not apply in the case of an applicable employer plan described in Code Sec. 414(v)(6)(A)(iv) (a SEP arrangement under Code Sec. 408(k) or a SIMPLE IRA plan under Code Sec. 408(p)). Thus, Code Sec. 414(v)(7)(A) applies in the case of an applicable employer plan that is a qualified plan under Code Sec. 401(a) (including a Code Sec. 401(k) plan), a Code Sec. 403(b) plan, or a Code Sec. 457(b) plan maintained by an employer described in Code Sec. 457(e)(1)(A) (an eligible governmental plan).
Code Sec. 414(v)(7)(D) allows the IRS to provide by regulations that an eligible participant may elect to change the participant's election to make catch-up contributions if the participant's compensation is determined to exceed the limitation under Code Sec. 414(v)(7)(A) after the election is made.
Section 603(b) of the SECURE 2.0 Act includes conforming amendments with respect to Section 603(a). Section 603(b)(1) of the SECURE 2.0 Act strikes Code Sec. 402(g)(1)(C). Prior to that amendment, Code Sec. 402(g)(1)(C) provided that an eligible participant's gross income does not include elective deferrals in excess of the applicable dollar amount under Code Sec. 402(g)(1)(B) ($22,500 for 2023) to the extent that the amount of those elective deferrals does not exceed the applicable dollar amount under Code Sec. 414(v)(2)(B)(i) ($7,500 for 2023) for the tax year (without regard to the treatment of the elective deferrals by an applicable employer plan under Code Sec. 414(v)).
Section 603(b)(2) of the SECURE 2.0 Act amends Code Sec. 457(e)(18)(A)(ii) to replace "the applicable dollar amount for the taxable year determined under section 414(v)(2)(B)(i), or" with "the lesser of any designated Roth contributions made by the participant to the plan or the applicable dollar amount for the taxable year determined under section 414(v)(2)(B)(i), or".
Section 603(c) of the SECURE 2.0 Act provides that the amendments made by Section 603 apply to tax years beginning after December 31, 2023.
Notice 2023-62
In Notice 2023-62, the IRS provided guidance with respect to Section 603 of the SECURE 2.0 Act. The IRS stated that the notice is not intended to provide comprehensive guidance as to Section 603, but rather is intended address particular issues to assist in the implementation of that section. The notice also announces a 2-year administrative transition period with respect to the requirement under Section 603 that catch-up contributions made on behalf of certain eligible participants be designated as Roth contributions. The IRS stated that it is aware of taxpayer concerns with being able to timely implement Section 603 of the SECURE 2.0 Act. The administrative transition period described in Notice 2023-62 is intended to facilitate an orderly transition for compliance with that requirement.
Guidance on Catch-Up Contributions for Tax Years Beginning After December 31, 2023
Pursuant to Code Sec. 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 Code Sec. 414(v) in any plan year. Accordingly, for tax 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 Code Sec. 402(g)(1)(B) (or deferrals under the plan that exceed the applicable dollar amount under Code Sec. 457(e)(15)) if those contributions in excess of the applicable dollar amount satisfy the requirements under Code Sec. 414(v) for catch-up contributions. According to the IRS the elimination of Code Sec. 402(g)(1)(C) under Section 603(b)(1) of the SECURE 2.0 Act does not change this result for tax years beginning after December 31, 2023.
If an eligible participant is subject to the requirements of Code Sec. 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 Code Sec. 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 Code Sec. 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 Code Sec. 402(g)(1)(A) (and do not exceed the limitation in Code Sec. 457(b)(2)) because, in accordance with Code Sec. 414(v)(3)(A)(i), the limitations on elective deferrals under Code Secs. 401(a)(30) and 403(b) (and the limitation on deferrals under Code Sec. 457(b)(2)) do not apply to those catch-up contributions.
Guidance on Elective Deferrals Made to Two or More Plans
If an individual makes elective deferrals to two or more plans during a tax year (including plans maintained by unrelated employers), then, under Code Sec. 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 Code Sec. 402(g)(1)(B). Similarly, an eligible participant's elective deferrals made to two or more plans during a tax year are also aggregated for purposes of applying the limitation on the amount of catch-up contributions under Code Sec. 414(v)(2). The IRS stated that the elimination of Code Sec. 402(g)(1)(C) under Section 603(b)(1) of the SECURE 2.0 Act does not change this result for tax years beginning after December 31, 2023.
Administrative Transition Period
Under Section 603(c) of the SECURE 2.0 Act, the provisions of Section 603 apply to tax years beginning after December 31, 2023. However, the first two tax years beginning after December 31, 2023, will be regarded as an administrative transition period with respect to the requirement under Code Sec. 414(v)(7)(A) that catch-up contributions made on behalf of certain eligible participants be designated as Roth contributions. Specifically, until tax years beginning after December 31, 2025, (1) those catch-up contributions will be treated as satisfying the requirements of Code Sec. 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 Code Sec. 414(v)(7)(B).
Guidance Under Consideration Regarding Section 603 of the SECURE 2.0 Act
The IRS noted that it intends to issue further guidance to assist taxpayers with the implementation of Section 603 of the SECURE 2.0 Act. The guidance that the IRS anticipates issuing with respect to Section 603, after taking into account any comments received, is expected to include:
(1) Guidance clarifying that Code Sec. 414(v)(7)(A) would not apply in the case of an eligible participant who does not have wages as defined in Code Sec. 3121(a) (that is, wages for purposes of the Federal Insurance Contributions Act (FICA)) for the preceding calendar year from the employer sponsoring the plan. For example, under that guidance, if an eligible participant did not have any wages for purposes of FICA for the preceding calendar year because the individual was a partner (or other self-employed individual) receiving self-employment income or because the individual was a state or local government employee whose services were excluded from the definition of employment under Code Sec. 3121(b)(7), then the eligible participant would not be subject to the requirements of Code Sec. 414(v)(7)(A).
(2) Guidance providing that, in the case of an eligible participant who is subject to Code Sec. 414(v)(7)(A), the plan administrator and the employer would be permitted to treat an election by the participant to make catch-up contributions on a pre-tax basis as an election by the participant to make catch-up contributions that are designated Roth contributions.
(3) Guidance addressing an applicable employer plan that is maintained by more than one employer (including a multiemployer plan). The guidance would provide that an eligible participant's wages for the preceding calendar year from one participating employer would not be aggregated with the wages from another participating employer for purposes of determining whether the participant's wages for that year exceed $145,000 (as adjusted). For example, under that guidance, if an eligible participant's wages for a calendar year were: (i) $100,000 from one participating employer; and (ii) $125,0000 from another participating employer, then the participant's catch-up contributions under the plan for the next year would not be subject to Code Sec. 414(v)(7)(A) (even if the participant's aggregate wages from the participating employers for the prior calendar year exceed $145,000, as adjusted). The guidance also would provide that, even if an eligible participant is subject to Code Sec. 414(v)(7)(A) because the participant's wages from one participating employer in the plan for the preceding calendar year exceed $145,000 (as adjusted), elective deferrals made on behalf of the participant by another participating employer that are catch-up contributions would not be required to be designated as Roth contributions unless the participant's wages for the preceding calendar year from that other employer also exceed that amount.
For a discussion of catch-up contributions to applicable employer plans, see Parker Tax ¶131,135.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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