AICPA suggests changes in Roth IRA catch-up contribution rules

The American Institute of CPAs is asking the Treasury Department and the Internal Revenue Service to modify its guidance on catch-up contributions in the wake of the SECURE 2.0 Act of 2022 requirement that certain catch-up contributions be made as Roth IRA deferrals.

Last August, the Treasury Department and the IRS released Notice 2023-62, pointing out that Section 603 of the SECURE 2.0 Act requires catch-up contributions to be designated as Roth contributions pursuant to an employee election for certain eligible participants. Thus, retirement plans that allow catch-up contributions have to offer a Roth contribution feature in the plan.

The AICPA offered several recommendations in response to the notice. In terms of the timing, the AICPA suggested that the Treasury and the IRS issue guidance stating that federal income tax withholding with respect to a participant’s mandatory Roth catch-up contribution is not required before February 1 of the year in which the amount is contributed. 

When it comes to coordination with actual deferral percentage test corrections, the AICPA recommended they issue guidance allowing an elective deferral that’s treated as a Roth catch-up contribution — due to being recharacterized based on the failure of the actual deferral percentage test — to be taxable to the participant in the year of recharacterization.

Another recommendation involves calculating the wage limitations for employees receiving wages from more than one employer in a controlled group. There, the AICPA suggested that future guidance be issued in relation to Section V.3 of the notice clarifying that for purposes of determining if an employee’s participating wages exceeds $145,000 (as adjusted), only wages from the employee’s specific common law employer in the previous year should be included, and only if it’s a participating employer in the plan. 

On the matter of a potential reversal of Roth designation, the AICPA said the Treasury and the IRS should issue guidance saying that an individual who has deferrals characterized as Roth contributions as a result of not contributing deferrals equal to the regular limit be allowed to have them designated as regular deferrals.

“Due to the mandate in SECURE 2.0 requiring certain catch-up contributions be made on a Roth IRA basis, the IRS issued Notice 2023-62 to help implement the provision,” said Kristin Esposito, director of AICPA tax policy and advocacy, in a statement Friday. “AICPA wants to highlight certain administrability issues noticed in the guidance that we believe will make for a smoother transition.”