Extension on 401(k)/403(b)/457(b) Catch-Up Contribution Updates Give Employers More Time to Implement Changes
The Secure Act 2.0, passed in late 2022, provides new provisions to help workers save for a more financially secure retirement. Many of these changes impact entities that already have employer sponsored plans in place. While initially set to go in effect January 1, 2024, the IRS recently provided some relief in Notice 2023-62 by extending the new catch-up contribution deadline to January 1, 2026. The Treasury Department and the IRS intend to issue further guidance to assist taxpayers with the implementation of section 603 of the SECURE 2.0 Act.
Increased Catch-Up Contributions for Higher Earners Now Scheduled for 2026
The Secure Act 2.0 offers better catch-up contributions for employees, as well as some account distinctions based on income levels. Employers must review these changes to make sure their existing 401(k)/403(b)/457(b) plans have everything in place to remain compliant once the various deadlines go into effect.
Highly compensated employees required to make catch-up contributions in a Roth account.
Current tax law allows employees who are 50 or older to make catch-up contributions each year. In 2023, the 401(k)/403(b)/457(b) contribution limit is $22,500 for all plan participants, plus an additional $7,500 for employees who meet the catch-up age requirement. Previously, those employees could choose whether to place their contributions and catch-up funds in a pre-tax 401(k)/403(b)/457(b) account, or, if the option was available through their plan, in an after-tax Roth 401(k)/403(b)/457(b) account, or a combination of both.
The Secure 2.0 Act, however, has mandated that high-income taxpayers who are 50 or older place their catch-up contributions in an after-tax Roth account, no longer allowing those funds to go in a pre-tax 401(k)/403(b)/457(b) account. Employers who do not currently have a Roth option in their plan must amend their plan to allow this option before 2026. Otherwise, employees who earn incomes over the prescribed limits would no longer be allowed to make catch-up contributions to their plan.
In addition, if the plan is amended to allow Roth contributions, then all eligible participants in the plan must be permitted to make catch-up contributions as designated Roth contributions.
Follow this step-by-step guidance to understand all the details of this change and how your entity needs to prepare.
Understand your entity’s high-earning demographic
Currently, the Secure 2.0 Act defines high earners as those with wages totaling $145,000 or more of their prior year’s wages. This number will adjust due to inflation each year. As your entity prepares for 2026, estimate how many employees fall into this category, both in terms of age and earnings. You may also consider looking at whether or not they currently take advantage of catch-up contributions. If you have employees in this category, you’ll need to make sure your plan is amended to include a Roth option if it’s not already available. In addition, you will need to make sure your payroll service provider has the Roth option enabled as well.
Employer and Provider Concerns to Address
Before implementation of these changes was pushed to January 1, 2026, employers, plan sponsors, benefits administrators, and payroll providers were worried due to the multiple administrative hurdles in implementation. Here are some of the challenges to address in the near term:
● Develop processes to identify high-income plan participants who are 50 or older (and those who will soon fall into that bucket). Review their contribution history to see if they are taking, or plan to take, advantage of catch-up contributions. If so, talk to your service provider about making sure Roth contributions are allowed in your plan.
● Institute changes in your payroll system for Roth contributions and catch-up contributions to restrict catch-up contributions for high-income taxpayers to Roth contributions and communicate the changes to your employees.
● Choose between amending your plans to allow Roth contributions or, potentially discuss eliminating the ability to make catch-up contributions for high-income taxpayers who are 50 and over.
The IRS’s extension of the effective date for the Section 603 requirements is good news for employers and vendors. But planning ahead is essential to implement all the necessary changes before the new deadline. We encourage all employers to talk with their service providers, plan representatives, and accounting advisors. Plan sponsors would be wise to start sooner rather than later.