Employees who have a Section 401(k) plan are allowed to contribute up to $22,500 in 2023. Workers who are age 50 and older can also transfer a "Catch-Up" contribution of $7,500 to their account. The total 2023 contribution could be $30,000 for these individuals.

In 2022, Congress passed a major retirement bill with the title Secure 2.0 Act. This bill changed many of the rules on retirement contributions. One change is scheduled to take effect in 2024. Individuals who have earned over $145,000 will be able to make a 401(k) catch-up contribution of $7,500 (with potential increases in 2024 and future years). However, the catch-up contributions in 2024 and future years must be after-tax funds to a Roth IRA. Previously, the law permitted the catch-up contribution to be added to the regular 401(k) and funded with pre-tax dollars. The changed rule will require higher-income taxpayers to pay taxes now and transfer funds to the Roth IRA. Congress passed the Roth IRA rule for catch-up contributions because individuals will pay more taxes in an earlier year with a Roth IRA.

On June 29, a coalition of over 100 organizations sent a letter to the House Ways and Means Committee leaders. The coalition includes the National Association of State Retirement Administrators and many other organizations. The letter explained there is no possible way that the computer software for these organizations can be updated in time to handle the catch-up Roth IRA change for 2024. The letter notes, "But we have been struck by the overwhelming input from the retirement community that this particular task simply cannot be done in time by a vast number of plans."

The organizations warn that "many retirement plan participants will lose the ability to make catch-up contributions at the end of this year."

The organizations recommend that Congress or the Internal Revenue Service (IRS) allow a two-year delay in requiring a Roth catch-up IRA. They continue, "These circumstances pose a long list of other obstacles, including, for many plans, the challenges of adding a Roth feature and communicating that feature to participants, as well as special challenges for state and local governments and collectively bargained plans."

Editor's Note: The threat that many plans will need to eliminate 2024 catch-up contributions is quite substantial. It is possible that Congress or the IRS will delay the implementation of this new rule.