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Tax, Employee Benefit Services

IRS Contributions Rule Change for High-Earner 401(k)s

At a Glance

Main Takeaway

The SECURE 2.0 Act of 2022 (the Act) mandates that individuals aged 50 and older earning $145,000 (indexed for inflation) or more make “catch-up” contributions to their employer-sponsored 401(k) on a Roth basis, meaning those extra contributions are to be made with money you’ve already paid taxes on. Therefore, you would pay taxes on your retirement contributions now but could withdraw the money tax-free in retirement.

While these changes were scheduled to go into effect in 2024, the Act lacked guidelines explaining how a high-earner 401(k) beneficiary could make catch-up contributions. The oversight leaves many firms unable to implement the new rule on time.

Next Step:

The IRS recently published a rule change to help your business communicate with high-earning employees and prepare accordingly when the changes go into effect.


Understanding the Catch-Up Contributions Oversight

Many companies supported the SECURE 2.0 Act but were unsure how to apply its rules, especially regarding catch-up 401(k) contributions for high-earners.

Various employers voiced concerns about meeting the 2024 deadline. These included public entities, nonprofits like the American Retirement Association, and corporations like Microsoft and Delta Airlines.

They cited challenges in updating payroll systems and making administrative adjustments within these systems. These businesses have asked for a delay until 2026 to allow for proper implementation of Roth catch-up contributions.


IRS Announces Relief Period for High Earners

On August 25, 2023, the IRS published an announcement addressing oversight of catch-up contributions in the SECURE 2.0 Act. The announcement offers new guidelines, providing more time for your company to adapt.

Here is what the IRS statement means for your business and high-earner 401(k) beneficiaries:

  • Extension of the transition period: The IRS extended the 2024 transition deadline by two years, allowing your organization to complete administrative changes and avoid internal disruptions.
  • Rule clarification for beneficiaries 50 and over: Employees aged 50 and older in your company’s 401(k) plan can still make pre-tax catch-up contributions after 2023, regardless of their annual income.
  • Roth catch-up contribution rule: Starting in 2026, high-earner beneficiaries of your organization’s sponsored 401(k) plan will be subject to the Roth catch-up contribution rule.


Plans for Future SECURE 2.0 Act Clarifications

In Notice 2023-62, Section V, the IRS and the Department of the Treasury offer additional guidance to help organizations and plan beneficiaries. Three key points for potential future announcements are:

Common examples include partners with self-employment income, specific categories of employees in a limited liability company (LLC), and other partners with non-standard individual tax preparation needs.

  • Pre-tax contributions treated as Roth contributions: The new guidance will direct plan administrators on how to treat specific pre-tax catch-up contribution elections as Roth contribution elections.
  • Wage aggregation: New rules will be provided regarding employees with retirement plans from multiple employers. For instance, the IRS will determine whether employees will be required to combine their wages from all employers to determine if they meet or exceed the $145,000 threshold.


Importance of Keeping Up With New Guidelines Under the Secure 2.0 ACT

Staying updated with the new guidelines under the SECURE 2.0 Act is crucial for your business and its high-earning employees. Being unaware or non-compliant can lead to missed opportunities, such as maximizing tax benefits or optimizing retirement contributions.

If your company falls behind in implementing these new regulations, you may be subject to penalties or experience complications when filing taxes. Working with a professional advisory and accounting firm can provide the necessary expertise to handle these changes effectively.


How Windes Can Help Your Organization Adapt

While IRS clarifications offer more time for businesses to adjust to the SECURE 2.0 Act, it is important to act quickly. Windes can assist your company and ensure your business has enough time to transition to the new rules.

  • Comprehensive advisory services: Windes can help you understand the changes implemented by the IRS and the Treasury Department. Our team has the resources to analyze the law and rule clarifications. Our professionals can provide actionable insights and best practices to implement changes quickly and efficiently.
  • Employee benefit services: If your organization requires assistance adapting its internal accounting resources and payroll systems, Windes’ employee benefits services can help.

We can assist you in developing or adjusting retirement contribution plans that are both compliant and cost-effective. We will also ensure systems adhere to the SECURE 2.0 Act and ERISA guidelines.

  • Advisory services: Windes Advisory Services can help your company adapt to changes in the SECURE 2.0 Act. Our accounting professionals understand the recent regulatory changes and will ensure your company implements new IRS guidance to stay compliant.
  • Business tax planning: Our tax planning services proactively approach your business’s taxes. We examine your financial circumstances, identifying your sector’s relevant tax credits and deductions.

As tax regulations change, we stay updated, ensuring you are always aligned with current construction, real estate, or nonprofit tax guidelines.


Stay On Top of Regulatory Changes with Windes

Following and adapting to the latest tax regulations is crucial to remain compliant with the law and stay competitive. However, these laws change frequently, making it challenging to implement the requirements.

At Windes, our team stays up-to-date with the latest regulatory changes relevant to your company and business sector. We can help you understand laws, rule changes, and clarifications for regulations like the SECURE 2.0 Act to ensure your benefit offerings remain compliant.

Connect with our team today to start planning now with advice from our tax professionals.


Connect with us now to learn more about how to prepare for this change!
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