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Major SECURE 2.0 Error Puts Catch-Ups in Jeopardy: ARA’s Graff

The American Retirement Association (ARA) recently identified what it calls a “significant technical error” in the SECURE 2.0 Act of 2022 regarding catch-up contributions.

Specifically, according to wording in the current legislation, beginning in 2024, no participants will be able to make catch-up contributions (pre-tax or Roth).

That’s the result of the elimination of a subparagraph in the body of the legislation to allow for a conforming amendment—but in the process inadvertently eliminated the ability to make any pre-tax catch-up contributions, ARA CEO Brian Graff said Monday. In addition, since under current law Roth catch-up contributions can only be made for amounts that could have been excluded from income but for the Roth election — the current legislative text puts all such future contributions at risk.

ARA has already alerted the Treasury Department and the Joint Committee on Taxation about the issue, and the latter acknowledged that it does, in fact, appear to be a technical error. But getting it fixed on a timely basis is not certain at this point.

“Obviously, this significant technical drafting error was not intended, and it is going to need to get corrected,” Graff said. “The real question is when there will be a legislative vehicle in this Congress to get this done. In the meantime, it is unclear to us whether Treasury has the regulatory authority to ignore this error in the interim which potentially puts 2024 catch-up contributions at risk if Congress does not act before then.”

How This Happened

Section 603 of the Act is intended to require that catch-up contributions be Roth contributions, but there is an exception for individuals who do not earn more than $145,000 of FICA wages.

The problem is Section 603(b)(1) makes an amendment attempting to align the language (a “conforming amendment”) to the Internal Revenue Code by deleting subparagraph (C) of Section 402(g)(1). Section 402(g) generally provides for the exclusion of elective deferrals from a participant’s taxable income. The first two subparagraphs of Section 402(g)(1) set the general limits on the amount of elective deferrals an individual may exclude from income. 

The third subparagraph, which was deleted as part of the Act, increased the general pre-tax deferral limit by the amount of any catch-up contributions—and thus the elimination of that subparagraph technically eliminated the ability to make ANY pre-tax catch-up contributions (even for those who earn less than or equal to $145,000). 

To make matters more confusing, under Internal Revenue Code Section 402A, a participant can only designate a deferral as Roth if the deferral could otherwise be made on a pre-tax basis. Because the ability to make catch-up contributions on a pre-tax basis was eliminated, this means no catch-up contributions may be on a Roth basis either. Thus, participants cannot make catch-up contributions.

Next Steps

The process of fixing the error has started, yet ARA Retirement Education Counsel Robert Richter noted that it took Congress three years to make minor technical corrections to the SECURE Act (a.k.a. SECURE 1.0). However, considering the significance of this error, he said he expects more urgency in resolving it before 2024.

ARA Retirement Education Counsel Robert Richter and former Chief Content Officer Nevin Adams contributed to this report. 

All comments
Isaac Hutchison
4 months 2 weeks ago

Does the roth requirement for catch-up contributions for people who earned $145,000 apply to 457's?

The wording in section 603 says it applies to catch-up contributions to "qualified retirement plans." By rule, that should omit 457 plans, correct?