The Internal Revenue Service (IRS) released guidance on Friday afternoon that addressed Section 603 of the SECURE 2.0 Act concerning Roth catch-up contributions.
The guidance grants a two-year delay in the provision's effective date that mandates catch-up contributions must be Roth for those earning more than $145,000. More specifically, catch-up contributions can now be made on a pre-tax basis through 2025, regardless of income.
Calling it an administrative transition period, the guidance text states that "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."
It also addressed the technical error that would have eliminated all catch-up contributions beginning in 2024. Under the notice, catch-up contributions can continue to be made after 2023.
“The American Retirement Association had asked for relief on this issue, and we really appreciate Treasury and the IRS understanding how challenging it would have been to comply with the mandatory Roth catch-up requirement by January 1, 2024,” American Retirement Association CEO Brian Graff said. “Allowing for a two-year transition period is a big win for plan sponsors, recordkeepers and participants.”
"The IRS basically has announced that they are going to interpret around the legislative text glitch that's been discussed,” Kelsey Mayo, Outside Director of Regulatory Affairs for the American Retirement Association, added. “They're essentially saying catch-up provisions have not been eliminated, period. That’s point No. 1. And point No. 2 is now you don't have to make it a Roth for two years, and it can continue to be pre-tax catch-ups until 2026 regardless of income.”
The technical error, first identified by the American Retirement Association, would have eliminated all catch-up contributions (pre-tax or Roth) beginning in 2024. In January, the American Retirement Association first alerted the Treasury Department and the Joint Committee on Taxation to the issue.
The announcement also appeared to answer another question regarding the $145,000 Roth contribution threshold based on FICA wages. Confusion occurred over those who are self-employed (such as partners and sole proprietors) and, therefore, do not receive FICA wages.
"So the question is whether they could continue to contribute catch-ups pre-tax," Richter said. "The IRS agreed that they don't have FICA wages and aren’t subject to the Roth catch-up requirement. So this is confirmation that how we interpreted it was correct, which is always nice to see."
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