Secure 2.0 Drafting Error Threatens Catch-Up Contributions

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What You Need to Know

It appears that a legislative drafting error, if uncorrected, could jeopardize the ability to make catch-up contributions to retirement accounts.
Experts say technical correction is likely, even in a closely divided Congress with a lot to do.

A major technical drafting error that made its way into the sweeping Secure 2.0 Act legislation would ban all retirement account catch-up contributions after 2024, according to retirement industry media reports that first emerged Tuesday afternoon.

As first reported by the American Retirement Association’s John Sullivan (formerly of ThinkAdvisor), the drafting error involves Section 603 of the Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act. This section of the law is intended to require that catch-up contributions be directed to post-tax Roth accounts in cases where the contributor earns more than $145,000 of FICA-covered wages.

But, as the ARA reports, it appears that the complex process of meshing the Secure 2.0 Act’s Roth catch-up requirement with the preexisting text of the Internal Revenue Code has resulted in the approval of statutory language that will, if not changed, entirely eliminate the opportunity for retirement savers to make catch-up contributions to either traditional or Roth-style accounts.

This outcome would represent a significant departure from the legislation’s stated intent, as among its many retirement focused-provisions, the Secure 2.0 Act significantly boosts 401(k) plan retirement account catch-up contribution limits. Specifically, the maximum limits are slated to increase from $7,500 in 2023 to $10,000 for taxpayers aged 60, 61, 62 or 63 for tax years beginning after 2024.

The catch-up contribution limit will be increased to $5,000 for SIMPLE retirement plans, and for IRAs, the $1,000 catch-up contribution limit will be indexed for inflation beginning in tax years after 2023. As noted, starting in tax years beginning after 2023, all catch-up contributions for those earning more than $145,000 will be treated as Roth contributions.

A Big Deal or Headline Hype?

Expert reactions were decidedly mixed as the ARA’s eye-grabbing headline made the rounds across the retirement planning industry on Tuesday afternoon.

Planning expert Ed Slott of Ed Slott and Co. tells ThinkAdvisor the issue amounts to a “technical error in the law that will be fixed.”

“I don’t think the plan catch-up provisions are at risk,” Slott says. “This provision is not effective until 2024, and it will be fixed by then.”

In the advocacy group’s original report, ARA CEO Brian Graff says a timely correction is critical, and the real question is “when there will be a legislative vehicle in this Congress to get this done.”

In the meantime, Graff says, it is unclear to the ARA whether the Treasury Department has the regulatory authority to ignore the error.