As part of the 1,653 pages of the Consolidated Appropriations Act, 2023 we got, from pages 817 through 946, the SECURE 2.0 Act of 2022. Here we review aspects of this new pension law impacting me and my clients starting with the death blow to ADP testing as practiced when these 401(k) plans originated.
In the early days of 401(k)s, everyone did nondiscrimination testing where the top-paid group of participants would be limited as to how much they could make in 401(k) deferrals depending on how much everyone else deferred. If testing failed, the plan sponsor could either give those lower-paid participants an additional contribution or some of the those in the top-paid group would need to remove a portion of the 401(k) contributions they made during the year just ended.
Rules developed as to testing, including allowing safe-harbor contributions to be made to avoid testing and the addition of catch-up contributions that can be used to pass testing.
Most plans these days use the safe-harbors and many who do not rely on using recharacterizing regular 401(k) deferrals as catch-up to pass testing. But now we have this provision of Secure 2.0:
Section 603, Elective deferrals generally limited to regular contribution limit. Under current law, catch-up contributions to a qualified retirement plan can be made on a pre-tax or Roth basis (if permitted by the plan sponsor). Section 603 provides all catch-up contributions to qualified retirement plans are subject to Roth tax treatment, effective for taxable years beginning after December 31, 2023. An exception is provided for employees with compensation of $145,000 or less (indexed).
This is for 2024, so there is time to provide guidance—but a lot of plans get around having to return excess deferrals to HCEs after a failed ADP test by recharacterizing deferrals for some HCEs as catch-up. Would this no longer be possible if the deferrals were all regular 401(k) as catch-ups would need to have been Roth?
The original appeared here: https://burypensions.wordpress.com/2023/01/07/secure-2-0-1-death-of-401k-testing-as-we-knew-it/
Editor’s Note: The American Retirement Association joined over 100 organizations in sending a letter June 29 to the House Ways & Means Committee seeking a two-year delay of the Roth catch-up requirement in SECURE 2.0 that requires anyone who earned over $145,000 to make their catch-up contributions on a Roth basis. For more, click here: https://www.asppa.org/news/ara-major-organizations-urge-congress-delay-roth-catch-requirement
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