The IRS has announced a two-year administrative transition period for catch-up contributions to a qualified retirement plan (including a Section 401(k) plan) by highly compensated employees, permitting them to continue to be made on a pre-tax basis for taxable years beginning before January 1, 2026. For taxable years beginning after December 31, 2025, catch-up contributions for those employees will be designated as Roth contributions, which don’t reduce the employee’s taxable income. (Notice 2023-62, August 25, 2023, https://www.irs.gov/pub/irs-drop/n-23-62.pdf.)
The Roth designation requirement, originally scheduled to be effective for taxable years beginning after December 31, 2023, was adopted in the SECURE 2.0 Act of 2022, enacted December 29, 2022.
Employers said they needed more time to amend their retirement plans. Also, the IRS hasn’t issued regulations to implement the SECURE 2.0 Act of 2022.
The limitation applies for an eligible participant whose wages for the preceding taxable year from the employer sponsoring the plan exceeded $145,000, indexed for inflation after 2024.
The limitation doesn’t apply to a Simplified Employee Pension (SEP) or to a SIMPLE IRA plan.
When an individual makes elective deferrals to two or more plans during a taxable year, including plans maintained by unrelated employers, the deferrals are aggregated to determine whether the employee’s elective deferrals exceed the applicable limitation. (For 2023, the applicable limitation is the $22,500 elective deferral plus $7,500 catch-up contribution, or $30,000.) (This is a reminder, not a change in the law.)
The IRS plans to issue guidance that the limitation only applied to wages paid by the current employer when the plan is a multi-employer plan. Wages paid by any other businesses that participate in a multi-employer plan are disregarded.
The IRS also plans to issue guidance that the employer would be permitted to treat an election by a participant to make catch-up contributions on a pre-tax basis as an election to make catch-up contributions that are designated Roth contributions.
If a plan permits it, an employee still has the option of designating regular contributions and catch-up contributions as Roth contributions for 2023.
Employers with 401(k) plans should consult with their attorneys and retirement plan consultants about updating their plans.