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08.28.2023 Legal News

Treasury Issues Anticipated Relief for New Catch-up Contribution Rule

By: Marc Purintun & Brydon M. DeWitt 

The Internal Revenue Service (“IRS”) provided welcome relief for administrators of plans offering catch-up contributions. Notice 2023-62, issued on August 25, essentially delays the effective date of a provision under the SECURE 2.0 Act that would have required catch-up contributions made by high-earners to be treated as Roth contributions.

For background, SECURE 2.0 requires catch-up contributions* to a 401(k), 403(b), or 457(b) plan by participants who earned more than $145,000 in the prior year to be treated as after-tax Roth contributions. The change was to become effective January 1, 2024. Plan administrators and recordkeepers were racing to modify payroll systems to apply the new rule and track yet another compensation limit. Notice 2023-62 provides a two-year transition period to allow an “orderly transition” for compliance with the new rule. 

In addition, a provision of SECURE 2.0 inadvertently struck the section of the Internal Revenue Code that permitted catch-up contributions by any participant, effective in 2024. Notice 2023-62 clarifies that participants who are age 50 and older can continue to make catch-up contributions, notwithstanding the provisions of SECURE 2.0.

The Treasury Department and IRS intend to issue further guidance to assist plan administrators with this new rule to become effective in 2026, but in the meantime, plan administrators can take this rule off the list of SECURE 2.0 provisions to implement by January 1, 2024.

Please contact any member of the Employee Benefits and Executive Compensation Section if you have any questions about this guidance.

*A catch-up contribution is an elective deferral made by a participant age 50 or older that exceeds the statutory limit. For instance, the statutory limit for elective deferrals is $22,500 in 2023. However, participants who are age 50 or older by December 31 can make additional catch-up contributions up to $7,500 in 2023.