As we previously told you, section 603 of the SECURE 2.0 Act added section 414(v)(7) to the Internal Revenue Code. Section 414(v)(7) requires that catch-up contributions to 401(k) plans made by high-income earners be made as Roth contributions. This means that such contributions are to be made on an after-tax basis.
In other words, they are not excluded from the employee’s taxable income. The statute defines high-income earners as any employee who, during the preceding calendar year, had wages from the employer sponsoring the plan in excess of $145,000 (adjusted for inflation). The provisions of section 414(v)(7) were to become effective for plan years beginning after December 31, 2023.
On August 25, 2023, in recognition of the administrative burdens imposed on employers by this requirement, the IRS issued Notice 2023-62, which delays the implementation of section 414(v)(7) for two years. In the Notice, the IRS provides that the first two calendar years after December 31, 2023, will be treated as an “administrative transition period”. This means that catch-up contributions made by high-income earners during this “administrative transition period” can continue to be made as pre-tax contributions and are not required to be made as after-tax Roth contributions.
It also means that plans that do not permit Roth contributions will not be disqualified as a result. The Notice also provides that section 414(v)(7) will now become effective for plan years beginning after December 31, 2025.