What’s a paragraph worth in a thousand pages of Congressional legislation? Quite possibly, your ability to save thousands of dollars more in your company’s retirement plan.
The news regarding SECURE 2.0 broke earlier this week from the National Association of Plan Advisors (NAPA) when a staffer at the American Retirement Association discovered a major glitch in the law’s wording. According to the NAPA post, the accidental elimination of a third subparagraph in one section of SECURE 2.0 “eliminated the ability to make ANY pre-tax catch-up contributions.”
While the law clearly intends to increase catch-up provisions for those nearing retirement, the plain language of the law doesn’t allow for this. Mistakes like this, however, happen all the time.
“Because of the complexity of the Internal Revenue Code, it is not surprising that there are technical glitches in drafting appropriate language to implement any proposed changes,” says Marcia S. Wagner of The Wagner Law Group in Boston. “Secure Act 2.0 of 2022 itself made technical changes to the SECURE Act, although those corrections were relatively minor in nature. The clear intention of the change was to require catch-up contributions for plan participants to be Roth contributions unless the plan participant’s FICA compensation was less than $145,000. However, as drafted, the statutory language precludes any catch-up contributions to be made in 2024, either pre-tax or Roth.”
It should be noted that this wording error does not prohibit you from making catch-up contributions to your tax-deferred IRA or your Roth IRA. It only pertains to corporate plans, like 401(k)s and more advanced types of IRAs. “The error will not affect most IRA holders, both traditional and Roth IRA, but it will apply to SIMPLE IRAs and SEPs, which are both types of individual retirement accounts,” says Wagner.
In the past, legislative errors like this have been fixed in a variety of ways. Since this mistake won’t have any material impact until the 2024 tax year, Congress and the IRS have some time to think about the best way to handle this. There are three possible responses to this particular technical glitch.
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“The first and most straightforward would be for Congress to enact a technical correction to address this mistake,” says Wagner. “On the substance of the modification, there should be unanimous agreement because no member of Congress believed that they were voting to eliminate catch-up contributions in 2024. Technical corrections legislation is generally not enacted on an accelerated basis, although the potential magnitude of this error should result in a quick fix.”
Right now, Congress has more pressing issues than a tax law hiccup that won’t manifest itself for a year or so. Legislators are likely to focus on these. In the meantime, there may be another avenue to take.
“If Congress does not act, it is not clear whether IRS has the regulatory authority to interpret the statutory language to reflect what was intended, rather than what was drafted,” says Wagner. “IRS might rely on a rarely applied rule of statutory interpretation, that the plain, literal meaning of a statute should not be followed if it would lead to an absurd result or a result that could not possibly have been intended.”
Of course, because it’s uncertain whether the IRS will intervene, plan sponsors and participants have a third option.
“For the same reason, if neither Congress nor IRS takes action in 2023,” says Wagner, “many plan sponsors will follow the intended meaning of the law, in the reasonable assumption that even if the error was not fixed in 2023, the error will eventually be corrected.”
While this might sound reasonable for plan sponsors, third-party plan administrators may not be willing to risk exposing themselves to an unknown fiduciary liability by circumventing the law’s precise language, no matter how flawed.
“My problem is that any purported catch-up made in 2024 would actually be an excess deferral (as defined by law) and thus subject to the well-established correction process,” says Lawrence C. Starr, President of Qualified Plan Consultants, Inc. in West Springfield, Massachusetts. “How can I ignore that in preparing the annual administration of the plan? The client pays us to do their plan right; that means ‘in compliance with the law.’ If Congress hasn’t fixed the problem by 12/31/24, I will have a real problem just ‘ignoring it.’ If IRS were to issue some sort of relief ruling, I would most likely be comfortable following their guidance, but without that, we have a real problem with ‘ignoring’ catch-up amounts made during the year.”
It’s possible there is a fourth way, depending on how you interpret existing tax law not affected by SECURE 2.0.
“Technically, Section 1.414(v)-1 (Catch-up Contributions) states that any applicable plan can provide for catch-ups,” says David Levine, Principal and Co-Chair of Plan Sponsor Practice at the Groom Law Firm in Washington, DC. “The IRS can say that 414(v) is still in the code and that they will abide by that but hope to get some clarification from Congress.”
Wagner wonders if the IRS would be willing to be this aggressive. “I guess the IRS could use the argument, but probably wouldn’t, and would probably rely on normal statutory construction,” she says. “I do not believe the IRS can rely upon a regulation that is facially inconsistent with the text of the statute. A regulation that is inconsistent with a Code Section may not be formally modified until years after the statutory change, if at all. That said, if Congress does not take any action to address this glitch in 2023, the IRS may advance any argument that it can to avoid applying the plain meaning of the text. I can’t predict the arguments that IRS will advance if Congress takes no action in 2023; it is possible IRS would look to the existing catch-up contribution regulation, but I believe that existing rules of statutory construction provide the better argument—to wit, if Congress intended to eliminate catch-up contributions from the Code, it certainly could have done so in a far more straightforward manner; hence there was no intent to eliminate.”
Remember, this technical glitch does not change what you can do in 2023. It only affects 2024. Until then, here’s hoping rational heads will ultimately prevail in Washington.