IRS guidance provides breathing room for implementing SECURE 2.0 Act catch-up contribution rule

As you probably already know, qualified retirement plans are permitted, but are not required, to allow participants who are age 50 or older to make additional elective deferrals (including designated Roth contributions), known as “catch-up” contributions.  For most plans, the catch-up contribution limit for 2023 is $7,500.

Last year, President Biden signed into law far-reaching retirement plan legislation known as SECURE 2.0 Act that included many new rules for employers and their qualified requirement plans.  One of the new rules, Section 603 of the SECURE 2.0 Act, specifically targets catch-up contributions.  This new rule generally provides that effective January 1, 2024, plan participants age 50 or older who earn more than $145,000 annually and who decide to make catch-up contributions must do so on a Roth basis, using after-tax money.

Although seemingly straightforward, this new rule creates administrative complexities that made its implementation difficult for plan sponsors.  For instance, employee benefit professionals recognized that in order to comply with the new rule, plan sponsors needed to quickly identify those participants age 50 or older who earned more than $145,000 the previous year and potentially adjust their payroll systems and plans.

IRS delays implementation deadline by two years

Just last Friday, the IRS released Notice 2023-62, “Guidance on Section 603 of the SECURE 2.0 Act with Respect to Catch-Up Contributions,” that provides welcome guidance on the new catch-up contribution rules.  Most importantly, the Notice grants a two-year delay in the provision’s effective date so catch-up contributions can now be made on a pre-tax basis through 2025, regardless of income.  This new transition period provides plan sponsors breathing room to implement the new catch-up contribution rules.

The Notice’s comment period runs through October 24, 2023, after which time the Treasury Department and the IRS intend to issue further guidance on Section 603 of the SECURE 2.0 Act.

McAfee & Taft’s Employee Benefits & Executive Compensation attorneys will continue to monitor for updates to SECURE 2.0 Act and consider their impact on plan sponsors and their plans.

Another ERISA stock-drop plaintiff meets icy reception by the courts

Much like our frigid weather, the courts continue their chilly reception of ERISA stock-drop claims.   Just earlier this month in Varga v. Gen. Elec. Co., No. 20-1144-cv, 2021 WL 391602 (2nd Cir. February 4, 2021), the U.S. Court of Appeals for the Second Circuit affirmed a lower court’s dismissal of an ERISA lawsuit for breach of fiduciary duty.

In Varga, the plaintiff was a GE employee who participated in the GE 401(k) plan that offered a GE Stock Fund as one of the plan’s investment options.  The plaintiff sued GE and its CEO alleging that the defendants breached their ERISA fiduciary duty of prudence by continuing to offer the GE Stock Fund when GE improperly inflated the value of the stock for years by failing to publicly disclose a significant mistake.  And, once GE released this news to the public, the GE stock price dropped which adversely impacted plan participants.

The Varga court rejected the claim reasoning that the plaintiff failed to satisfy the tough pleading standards for a breach of ERISA’s duty of prudence claim set forth by the U.S. Supreme Court in Dudenhoeffer v. Fifth Third Bankcorp, 573 U.S. 409 (2014): “whether a plaintiff has plausibly alleged an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund that to help it.”   The Varga court concluded that “Varga failed to adequately plead alternative actions that the fiduciaries could have taken.”  Or, in other words, what else was GE or its CEO supposed to do?

The take-away for benefits professionals is that post-Dudenhoeffer decisions have consistently found that claims based on the nondisclosure of insider information about the employer rarely survive the pleading stage.  We will continue to monitor ERISA stock-drop cases and keep you updated with any new developments.



New legislation focusing on retirement savings attempts to build on SECURE Act


As you probably remember, last year President Trump signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.  The SECURE Act was a far-reaching and bi-partisan effort aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their savings.  A few of the major components of the SECURE Act included:

  • Pushing back the age at which retirement plan participants need to take required minimum distributions from 70 ½ to 72.
  • Repealing the maximum age for traditional IRA contributions.
  • Allowing individuals to use 529 plan money to repay student loans.
  • Allowing penalty-free withdrawals from retirement plans for birth or adoption expenses.

Securing a Strong Retirement Act of 2020

Just last month, Congressmen Richard Neal (D-Mass) and Kevin Brady (R-Texas) introduced the Securing a Strong Retirement Act of 2020.  This new legislation attempts to build on the momentum from last year’s SECURE Act to encourage retirement savings. A few highlights of this new bill include:

  • Promoting saving earlier for retirement by expanding automatic enrollment in retirement plans.
  • Pushing back further the age at which retirement plan participants need to take required minimum distributions from 72 to 77.
  • Increasing catch-up contributions for those age 60.
  • Treating student loan payments as elective deferrals for purposes of matching contributions.

A copy of the Securing a Strong Retirement Act of 2020 and section-by-section summary of the bill can be found in the attached press release by the Ways & Means Committee:

Moving forward

It is unclear if this legislation will pass next year in a possibly deeply-divided Congress.  But it appears there is consensus among both parties to help Americans save for retirement.   We will continue to monitor Congress’s progress with this new important piece of legislation.

New Supreme Court ruling may affect employee benefit plans

As you probably already know, the Supreme Court issued several important decisions during this year’s term. One of the most ground-breaking was their decision in Bostock v. Clayton County holding that Title VII of the Civil Rights Act of 1964 protects transgender, gay and lesbian employees from workplace discrimination based on their sexual orientation or sexual identity. You can find the decision here:

While Bostock applied to the termination of a LGBT employee, we should carefully consider its potential impact on employee benefit plans.  To get a sense of where this rapidly evolving nondiscrimination law may be headed, this blog post provides of a snapshot of the legal framework prior to Bostock and some specific considerations for benefit plan professionals after Bostock.

Pre-Bostock background:

As you may recall, in 2016 the HHS issued nondiscrimination regulations under Section 1557 of the ACA that generally prohibited discrimination on the basis of race, color, national origin, sex, age or disability under health programs or activities that receive HHS funding. These regulations interpreted Section 1557 to prohibit discrimination “on the basis of sex” to include discrimination based on transgender status, gender identity or gender expression in healthcare to include certain health plans.

But just this June, HHS issued revised the Section 1557 nondiscrimination regulations and significantly changed the prior regulations. Importantly, the regulations repealed the prior regulations that defined discrimination “on the basis of sex,” to include discrimination based on gender identity. Further, these new regulations made clear that Section 1557 does not apply to employer-sponsored group health plans that do not receive HHS funding and are not principally engaged in the business of providing healthcare.

Post-Bostock considerations:

Now that the U.S. Supreme Court has ruled that employers violate Title VII (of course, different and separate from 1557 under the ACA) when they discharge employees based on sex, the impact that this decision could have on employee benefit plans remains to be seen. It is clear that employers should use caution when considering benefit plan provisions that may treat employees differently based on sex, including their sexual orientation or transgender status. At a minimum, special care should be made to review relevant plan/coverage terms, including those pertaining to gender dysphoria, gender-affirmation surgery or mental health benefits, as well as plan terms covering same-sex spouses and same-sex domestic partners.

Please let us know if you have any questions.