Extension on Catch-Up Contribution Requirement Comes as Relief to Plan Sponsors

Plan sponsors and industry leaders can now breathe easier, as the Internal Revenue Service announced on August 25 a two-year extension on the SECURE 2.0 requirement that any catch-up contributions made by higher-income participants in eligible DC plans be designated as Roth.  

The ERISA Industry Committee had sent an open letter to the Department of the Treasury and the IRS in July requesting the two-year extension for implementation, as many in the industry argued it would be administratively challenging to implement by the original 2024 deadline. 

Under Section 603(c) of the SECURE 2.0 Act of 2022, 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. 

Section 603 of SECURE 2.0 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. 

“Retirement plan sponsors are grateful to the Internal Revenue Service for issuing critically important relief today under the SECURE 2.0 Act,” said Diann Howland, the vice president of legislative affairs at the American Benefits Council, in a statement.  

“Without this additional compliance period, a vast number of plans and employers would not have been able to comply with the new requirement and likely would have had to suspend catch-up retirement contributions,” Howland said. “We commend the IRS for acting in time to preserve these retirement savings opportunities.” 

Carl Gagnon, assistant vice president of global financial well-being and retirement programs at Unum, an insurance company based in Chattanooga, Tennessee, said while his company felt prepared for implementation of the catch-up contributions, the delay is still welcome. 

“Unum was on this early and are pleased that collectively bargained, association [and] smaller plans will have the time to implement Roth and post-tax catch-up provisions,” Gagnon wrote in an email. “We’ll wait for further regulatory guidance and take the time to concentrate on other financial wellbeing program priorities, such as helping employees with student debt management, mental health and building emergency savings.” 

Valerie Burns, human resource director at IFP Motion Solutions Inc. in Cedar Rapids, Iowa, said she also feels relieved to have additional time for implementation.  

“Although we do currently have a Roth component in our plan, we were relieved to have additional time to consider how to implement the requirement and to also allow time for payroll providers to handle the change,” Burns wrote in an emailed response. 

Kristi Baker, a managing partner at CSi Advisory Services, a division of Hub International that provides 401(k) and 403(b) retirement plan consulting, fiduciary oversight, financial wellness and more, added that the extension will help firms avoid making mistakes when implementing the new provision. 

“It is welcome news for our 401(k) and 403(b) plan sponsors,” Baker said in an emailed statement. “While most of our plans have the Roth provision, for those who had not yet adopted it, it is a welcome relief not to rush into decisions. This will allow the time needed to put in place best practices for administration, reducing errors and challenges.” 

In addition, Rich Linton, president and COO of Empower, wrote a statement noting the firm’s support of the IRS decision.  

“The defined contribution retirement system is a terrific example of a highly effective public-private partnership,” Linton said. “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.”  

Dave Gray, head of workplace investing platforms at Fidelity Investments added, “This two-year extension is good news for the American retirement saver, and we are relieved and pleased industry concerns have been addressed through this decision. This relief will provide critical time needed to implement the requirement and avoid the unintended consequences that could have led to a negative impact on retirement savings.”

Under the guidance released Friday, catch-up contributions will be treated as satisfying requirements of Section 414(v)(7)(A) through December 31, 2025, even if the contributions are not designated as Roth contributions. Further, a plan that does not provide a designated Roth contribution will be treated as satisfying the requirements of Section 404(v)(7)(B).