When the American Retirement Association discovered a glitch in the text of the SECURE 2.0 Act of 2022 last week that—if not fixed—would eliminate the ability for 401(k) participants to make catch-up contributions in 2024, the alarm bells started ringing.
ARA immediately alerted the Treasury Department and the Joint Committee on Taxation to the issue, with the latter acknowledging that it does, in fact, appear to be a technical error.
In a bill consisting of 130 pages, there are bound to be some drafting errors that create unintended consequences that need to be resolved. After all, SECURE 2.0 itself included some technical corrections to the original SECURE Act passed in 2019.
But fixing a “significant technical error” in a bill—even when it is clearly accidental—isn’t always easy for Congress, and there are a variety of ways it may be addressed in an effort to prevent unintended consequences.
Before we get to the options, a quick look back at the problem.
The bill’s Section 603, which is intended to require that all catch-up contributions be Roth contributions, contains a mistake that inadvertently means no participants will be able to make catch-up contributions (pre-tax or Roth) beginning in 2024. The accidental elimination of a subparagraph in the text of the bill creates the problem.
“We are hopeful it can be addressed as part of regulatory guidance clarifying catch-up contributions are still permitted and/or a future legislative technical correction.”
Groom Law Group’s Brigen L. Winters
Per the ARA article, Section 603(b)(1) makes an amendment attempting to align the language (a “conforming amendment”) to the Internal Revenue Code by deleting subparagraph (C) of IRC §402(g)(1). IRC §402(g) generally provides for the exclusion of elective deferrals from a participant’s taxable income. The first two subparagraphs of IRC §402(g)(1) set the general limits on the amount of elective deferrals an individual may exclude from income. The third subparagraph, which was deleted as part of the Act, increased the general pre-tax deferral limit by the amount of any catch-up contributions—and thus the elimination of that subparagraph technically eliminated the ability to make ANY pre-tax catch-up contributions (even for those who earn less than or equal to $145,000).
“While the elimination of a certain section of the Internal Revenue Code creates a potential error, we believe there was a clear intention by Congress in the SECURE 2.0 legislation to allow for catch-up contributions going forward,” said Brigen L. Winters, Principal at Groom Law Group, Chartered, in Washington D.C. “We understand that Congressional staff and the Department of the Treasury are aware of this potential error, and we are hopeful it can be addressed as part of regulatory guidance clarifying catch-up contributions are still permitted and/or a future legislative technical correction.
“Obviously, this significant technical drafting error was not intended, and it is going to need to get corrected,” ARA CEO Brian Graff said in ARA’s coverage of the issue. “The real question is when there will be a legislative vehicle in this Congress to get this done. In the meantime, it is unclear to us whether Treasury has the regulatory authority to ignore this error in the interim which potentially puts 2024 catch-up contributions at risk if Congress does not act before then.”
Potential catch-up glitch fixes
In a Jan. 25 article posted on Forbes, noted ERISA attorney Marcia Wagner of The Wagner Law Group outlines three possible ways the glitch might be resolved.
“The first and most straightforward would be for Congress to enact a technical correction to address this mistake,” Wagner said in the article. “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.”
If this is the preferred resolution, it likely needs to hitch a ride on another bipartisan bill moving through Congress this year. Because SECURE 2.0 didn’t move by unanimous consent, there’s no quick and easy shortcut to fixing the glitch.
Wagner suggested another solution could be specific guidance on the issue from the IRS. What’s not clear, she said, is whether the IRS actually has the regulatory authority to interpret the statutory language in a relief ruling to reflect what was intended, rather than what was drafted.
“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,” she said.
A third option Wagner mentioned is that, absent a formal correction, plan sponsors 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.
This would seem to clearly be “Plan C,” as it could open plan sponsors or TPAs to unknown fiduciary liability by circumventing SECURE 2.0’s precise language.
So, with Congressional staffers and the Treasury Department aware of the problem and not wanting to create unintended consequences, they have essentially the rest of 2023 to fix it. While they will no doubt look to address the problem sooner rather than later, a legislative fix could end up being attached to another end-of-the-year, must-pass spending bill (much like the 2019 Secure Act and the SECURE 2.0 Act of 2022).
Absent such a fix, the IRS could step in and issue guidance to circumvent the glitch. Stay tuned.
SEE ALSO:
• 401(k) Specialist SECURE 2.0 Guide
• Tax Credits Under SECURE 2.0 Expand Small Business Coverage
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.