Article

Employee benefits and executive compensation update

2023 year-end tax letter

Oct. 30, 2023 · Authored by Christine Faris

As we move into the final quarter of 2023, we are waiting for guidance relating to provisions of the retirement plan legislation, known as SECURE 2.0, that are effective in 2024 and 2025. Although the cost-of-living adjustments were issued for health plans, they have not yet been released for retirement plans and IRAs. In the meantime, the following topics of interest will be important for you to consider both for year-end tax planning and for tax planning in the coming year:

Employer-sponsored plans

1. Delayed – Roth catch-up contributions to employer sponsored plans

A recent IRS announcement delays the deadline until 2026 for requiring that catch-up contributions for employees making more than $145,000 in the prior year be designated as Roth after-tax catch-up contributions. The announcement also clarifies that catch-up contributions which had been inadvertently eliminated by SECURE 2.0 are reinstated. This means that employees will continue to have the choice of making pre-tax or after-tax Roth catch-up contributions in 2024 and 2025.

Employers and plan sponsors should consider the following action steps during the two-year transition period:

• Continue planning toward a timely Jan. 1, 2026, implementation date.
• Implementation and communication will take time and require coordination between plan sponsors, payroll teams and record keepers.
• Determine how and when affected participants will be identified.
• Determine how and when affected participants will be notified for each year.
• If a plan does not currently offer Roth contributions, consider whether to add a Roth provision.

2. Roth designation of employer contributions

Effective in 2023, 401(k) and 403(b) plans may be amended to give plan participants the choice to receive employer contributions on an after-tax Roth basis. Roth employer contributions are taxable to the employee when made. In addition, participants must be 100% vested at the time the contribution is made. If the plan also has non-Roth employer contributions that vest over a period of time, it could result in an employer maintaining multiple vesting schedules for each participant. Employers should consult with the plan’s record keeper and payroll provider to ensure the employer contributions are recorded correctly. Since the legislation does not address how a Roth designated employer contribution should be reported for tax purposes, (e.g., Form W-2, Form 1099-R), guidance from the IRS is anticipated. Until guidance is issued, employers may want to postpone offering this optional provision.