401k Catch Up Contributions Delay in Effect

IRS Delay

On August 25, the Internal Revenue Service (IRS) issued new guidelines in relation to Section 603 of the SECURE 2.0 Act, specifically addressing Roth catch-up contributions.

The guidance has introduced a modification to the effective date stipulated in the provision. This modification pertains to individuals earning more than $145,000 and mandates that catch-up contributions must be made in the Roth format. To provide more flexibility, the IRS has granted a two-year extension to this effective date. This means that catch-up contributions can be made on a pre-tax basis until 2025, irrespective of income level.

Furthermore, the guidance also tackles a technical error that was identified, one which could have resulted in the cessation of all catch-up contributions starting from 2024. With the newly issued notice, individuals will be able to continue making catch-up contributions beyond 2023.

CEO of the American Retirement Association, Brian Graff, expressed gratitude for the relief provided in response to their request. He highlighted the understanding shown by the Treasury and the IRS regarding the challenges that would have arisen in adhering to the mandatory Roth catch-up requirement by the original January 1, 2024 deadline. Graff emphasized that the allowance of a two-year transition period is a significant victory for plan sponsors, recordkeepers, and participants.

Kelsey Mayo, Outside Director of Regulatory Affairs for the American Retirement Association, elaborated on the IRS announcement. Mayo pointed out that the IRS intends to interpret around the legislative text discrepancy that had been a subject of discussion. Essentially, the IRS clarifies two key points. Firstly, the catch-up provisions are not being eliminated, regardless of the confusion caused by the legislative text. Secondly, for the next two years, there is no obligation to opt for Roth contributions; catch-up contributions can still be made as pre-tax until 2026, irrespective of income considerations.

It’s important to note that the technical error, which was initially identified by the American Retirement Association, had the potential to abolish all catch-up contributions (both pre-tax and Roth) from the year 2024 onwards. In January, the American Retirement Association notified both the Treasury Department and the Joint Committee on Taxation about this issue.

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Disclosures, Sources, and Footnotes

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