On Friday, August 23, 2023, the IRS issued Notice 2023-62, which provides long-awaited relief regarding the SECURE 2.0 requirement that age 50 catch-up contributions for higher income participants in Section 401(k), 403(b), and 457(b) plans be designated as Roth contributions (the “mandatory Roth catch-up” provision). Notice 2023-62 affords a two-year transition period and signals future guidance to facilitate ongoing implementation efforts.
Notice 2023-62 provides relief in what is styled as a two-year “administrative transition period” and indicates some of the anticipated guidance that Treasury and IRS, after taking into account any comments, expect to provide.
Administrative Transition Period: Without expressly delaying the effective date, Notice 2023-62 provides a two-year transition period to facilitate an orderly transition for compliance with the SECURE 2.0 provision. Until tax years beginning after December 31, 2025:
- Catch-up contributions made by affected participants will be treated as compliant, even if they are not made on a Roth basis.
- Plans that do not currently offer a Roth contribution option will be treated as compliant, without the need to add a Roth option at this time.
While this relief is welcome, Notice 2023-62 reflects an emphasis on “transition” by signaling future guidance in an effort to answer questions needed to move forward with implementation.
Guidance Under Consideration: To assist with implementation, Notice 2023-62 signals future guidance on certain issues that have been raised by plan sponsors, service providers, and practitioners:
- Participants with no prior-year FICA wages. Questions have arisen about treatment of individuals who have no prior-year FICA wages from the employer/sponsor. This group would include, for example, certain State or local government employees whose services are not “employment” under Code Section 3121(b)(7) (i.e., not subject to FICA because the government employee is covered by a qualified replacement plan). The IRS expects that future guidance will clarify that the mandatory Roth catch-up provision does not apply to these individuals.
- Plan-designated Roth catch-ups. Questions have also arisen about the ability to have a plan “override,” where the plan treats an employee’s pre-tax catch-up election as Roth in absence of the employee’s designation as such. The law currently requires that the Roth designation must be made by the employee at the time of the deferral election. This raises issues for plans that automatically treat contributions as catch-ups once they “spillover” the deferral limit, and plans that carryover deferral elections from year-to-year until changed by the employee. The IRS expects that future guidance will allow employers to treat a pre-tax catch-up election as a Roth election for affected participants.
- Application to plans maintained by more than one employer. The SECURE Act clearly states that prior-year FICA wages are taken into account only “from the employer sponsoring the plan.” This rule is straightforward when applied to a plan maintained by only one employer, but less so for plans maintained by more than one employer (including a governmental or multiemployer plan). The IRS expects that future guidance will clarify that wages need not be aggregated across participating employers within a single plan. Hopefully this guidance will specifically address FICA wages paid from participating (and non-participating) employers that are part of the same controlled group or affiliated service group.
Other Potential Guidance: Notice 2023-62 also requests comments on one of the critical questions about the SECURE 2.0 provision, without signaling what the answer may be:
- Are plans with affected participants required to offer a Roth feature? While more common in recent years, not all employers choose to offer a Roth option in their retirement plans. Can these plans comply with the SECURE Act by simply not allowing affected participants to make catch-up contributions?
Next Steps
NAGDCA has zealously advocated for transitional relief from the mandatory Roth catch-up provision since the passage of SECURE 2.0. We will be submitting a comment letter to the Treasury and IRS on requested issues explaining the needs of our members and the unique considerations of government plans. Please contact Matt Petersen at mpetersen@nagdca.org by September 12 with your feedback for incorporation into the NAGDCA comment letter. As always, NAGDCA is the committed voice of defined contribution plan administrators in Washington.