On August 25, the IRS issued guidance extending the deadline for employer-sponsored retirement plans to comply with the Roth catch-up contribution rule in Section 603 of the SECURE 2.0 Act by two years.
The rule mandates that retirement plan catch-up contributions must be made on a Roth basis by employees over the age of 50 who earned more than $145,000 in FICA wages during the previous plan year. While this change was originally set to start next year, Notice 2023-62 grants an “administrative transition period” that pushes the effective date to January 1, 2026 to “facilitate an orderly transition for compliance with that requirement” and allow more time for the IRS to issue guidance on open issues.
Under this new ruling, catch-up contributions are no longer required to be Roth until the new effective date in 2026, regardless of income. Plans that do not offer Roth contributions are not yet required to begin offering them; however, the delay offers employers a valuable window to reassess their retirement plans. While this postponement provides temporary relief, it's an opportune moment for plan sponsors to consider the advantages of incorporating Roth options into their Plan.
The ability to defer on a Roth basis allows retirement plan participants to further diversify their retirement savings strategy on a tax basis. These contributions are made with after-tax dollars, translating to tax-free withdrawals during retirement. Additionally, SECURE 2.0 will soon allow for employer contributions to be made on a Roth basis, and required minimum distributions will no longer be required for the Roth portion of a participant’s account. Both of these new provisions present valuable long-term retirement and tax options for participants.
The IRS Notice also addressed the technical error in SECURE 2.0 that would have eliminated all catch-up contributions starting in 2024. The updated guidance clarifies that plan participants who are age 50 and over can still make catch-up contributions after 2023.
We’re here to help! For more information about Roth contributions, speak with your Sentinel Retirement Plan Services Team.