IRS Extends Roth Catch-up Contribution Deadline

The Internal Revenue Service released guidance Friday extending by two years a requirement under SECURE 2.0 that catch-up contributions made by higher-income participants in eligible defined contribution plans be designated as Roth.

The notice announced a two-year transition period for the requirement. 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 IRS noted, the first two taxable years beginning after December 31, 2023, will be regarded as an administrative transition period.

The move comes after widespread retirement industry feedback that implementing the change for all defined contribution plan sponsors would be administratively challenging to get done by the original deadline. The ERISA Industry Committee had in a July letter requested a two-year extension for implementation, echoing calls by other groups including the National Association of Government Defined Contribution Administrators and the American Benefits Council.

Section 603 of the SECURE 2.0 Act of 2022 requires that catch-ups from participants in 401(k), 403(b), or governmental 457(b) plans earning $145,000 or more be made as Roth contributions.

Under the guidance released Friday those catch-up contributions, until 2026, will be treated as satisfying the requirements of section 414(v)(7)(A), even if the contributions are not designated as Roth contributions. Further, a plan that does not provide for designated Roth contributions will be treated as satisfying the requirements of section 414(v)(7)(B).

“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 notice says. “The administrative transition period described in this notice is intended to facilitate an orderly transition for compliance with that requirement.”

The two year delay is a “practical, efficient, solution” for plan sponsors and service providers of all sizes and types, David Levine, principal and co-chair of the plan sponsor practice at Groom Law Group, said via email. 

“For those sponsors who did not have Roth contributions in the first place, this change is a huge relief that allows them to continue moving forward toward Roth implementation without the pressure and potential failures created by a hard January 1, 2024 deadline,” he wrote. “For governmental plans, the relief is also positive in an additional way with its focus on FICA wages for employers that don’t have FICA wages.”

NAGDCA expressed its appreciation for the two-year transition period.

“NAGDCA applauds the Treasury department and IRS for authorizing a two-year transition period on Section 603 of SECURE 2.0,” Matt Petersen, NAGDCA executive director, said in a statement.

“Leadership at both agencies engaged openly with us on the issue, and we felt our concerns were heard every step of the way. Today’s guidance is an excellent example of the results of an open, fair, and considerate process.”

Empower, the nation’s second-largest recordkeeper, also applauded the decision.

“[The IRS’s] action will help ensure an orderly implementation process and address concerns raised by plan sponsors,” Rich Linton, president and chief operating officer, Empower, said in a statement. “The defined contribution retirement system is a terrific example of a highly effective public-private partnership. The engagement between the industry and the government on this matter proves that we can and will work together to drive improvements to a system that so many Americans rely on to help foster their future financial security.” 

The IRS noted that it and the Treasury Department will be issuing future guidance regarding catch-up contributions for taxpayers. The notice also invites public comment and suggestions for the future regarding the mandates.

Full text of the guidance, including instructions on where to give comment, may be accessed here.