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Federal Tax

Retirement Plan Sponsors Request Transition Relief From Section 603 Catch-up Contribution Change

Tim Shaw  

· 5 minute read

Tim Shaw  

· 5 minute read

A group of 50 retirement plan sponsors comprised of corporations, government entities, and other organizations sought transition relief from a provision of the SECURE 2.0 Act (PL 117-328) enacted late December last year, citing “numerous administrative hurdles.”

In a July 19 letter to Treasury Department Benefits Tax Counsel Carol Weiser and IRS Associate Chief Counsel Rachel Leiser Levy, the group addressed pain points felt from a change under Act Section 603 that, beginning 2024, requires catch-up contributions under an employer retirement plan for individuals with Federal Insurance Contribution Act (commonly known as payroll) wages exceeding $145,000 in the preceding calendar year to be made on a post-tax, Roth basis.

Among those undersigned on the letter were the U.S. Chamber of Commerce, the American Retirement Association, IBM Corporation, UPS, the Small Business Council of America, and Alight Solutions. They wrote that the $145,000 limit “is not related to any other limit that currently exists for qualified retirement plans. As such, to be able to implement this provision, plan sponsors will need to coordinate with their payroll providers and retirement plan recordkeepers,” which the group argues will be more difficult than perhaps initially anticipated by lawmakers.

The letter explains that payroll providers cannot determine which employees crossed the wage threshold by January 1 since employers do not furnish Forms W-2 until mid- to late-January, thus systems are not in place. Further, the group goes on to say that distinguishing age is another factor that is not accounted for. The necessary information would need to be on hand by New Year’s Day to determine which employees must make catch-up contributions on a Roth basis, which is “impossible,” according to the letter. More time would be needed to communicate with plan participants, they added.

Next, the group warns that the two approaches currently used to administer catch-up contributions would need to be “modified” or replaced by “an entirely new approach.” One method, referred to the single spillover contribution election, “an individual elects one amount, and catch-up contributions begin after the participant reaches the annual regular contribution limit and end” when that limit is reached. The other approach, the separate contribution election, a plan participant elects regular and catch-up contribution amounts that are both made over the course of the year and then reconciled to ensure the regular contribution limit set by the IRS isn’t reached. SECURE 2.0 conflicts with both of these approaches, the group argues.

“A transition will allow more time for Treasury to discuss the issues with stakeholders and provide guidance, and it also will give plan sponsors and service providers an opportunity to test the system at the end of the year and beginning of 2024 and fix any issues that might arise from the testing and discuss whether additional Treasury guidance is needed,” read the letter, indicating that December’s massive retirement legislative package is another example of a new law that needs deeper consideration before provisions’ effective dates kick in.

For more information regarding mandatory after-tax (Roth) treatment of catch-up contributions for employees whose wages exceed $145,000 in tax years beginning after December 31, 2023, see Checkpoint’s Federal Tax Coordinator ¶H-9249.2.

 

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