Roth catch-up contribution provision poses challenges for many plans

While the IRS late last year said it would delay implementation of the Roth catch-up contribution requirement for public-sector retirement plans until the end of 2025, the time is quickly passing with many questions and hurdles still facing plan administrators, according to Matt Petersen, executive director of National Association of Government Defined Contribution Administrators (NAGDCA).

This delay came in response to concerns raised by plan sponsors and administrators following the introduction of Section 603 of the SECURE 2.0 Act of 2022, which initially mandated individuals with earnings exceeding $145,000 to make all catch-up contributions as Roth after-tax contributions from 2024 onward.

The delay gives savers who are both nearing retirement and earning more than $145,000 two additional years to make catch-up contributions on a pre-tax basis.

The catch-up contribution is an elective deferral made by a participant aged 50 or older that exceeds statutory limits. In 2021, the statutory limit for employer-sponsored retirement plans stood at $19,500, with an additional catch-up contribution of $6,500 permitted for participants aged 50 or older.

Enabling legislation needed for states

"As soon as Secure 2.0 passed, we started to work on getting an extension for that provision," said Petersen. "Oftentimes government is afforded an extension." One of the main reasons is that a lot of the state systems have to get enabling legislation to make a change like that, he explained.

In states like Nevada, he said, "legislators will only meet every other year. So, they can't make those kinds of changes on the timeline that they were given. It just wasn't possible for a lot of the systems."

Petersen also explained that a number of the plans don't currently offer a Roth option, and so they have to make that change as well to enable the Roth catch-up contribution provision.

"One of the other reasons that we knew it was going to take quite a bit of time," said Petersen, "is that a lot of the state plans also allow political subdivisions to participate in their DC (defined contribution) plan. ... They have to know an income threshold and have to know who should and shouldn't have Roth. They don't have that process in place. They have to coordinate that, not only with those governments but with all of their payroll systems. So, there's a lot of code that's going to have to be written. In New York's case – they're kind of an extreme case – they have 2,200 political subdivisions, most of which don't use the same payroll system. They have to get all of those governments on the same page with this provision. Not a quick process."

Questions remain unanswered

There are still unanswered questions about implementing the Roth catch-up contribution provision, said Petersen.

"We know that the IRS and Treasury did a lot just to afford us that [delay]," he said, adding, "But we haven't gotten any further guidance. ... Because there are so many unanswered questions about the provision, [many plans] haven't been able to do anything yet to really start to implement it. While we've been given two years, it's quickly becoming a year and a half, which, if we don't get any more guidance, could be a year, and that's going to put everybody back in the same situation."

Most of the outstanding questions revolve around income verification, said Petersen. "If a state plan has somebody who's working for multiple employers that are participating in the state DC plan, who is responsible for verifying the income of those individuals? ... Say you made $80,000 at one employer and you made $70,000 at another employer, they typically can't see that because both of those payroll systems don't connect. So the question is who is responsible for that?"

"Essentially we were given some time, we were given some breathing room, and now we're having to talk to our members and really try to understand if this is something they can do," said Petersen. "If it's not, then we will have to go back and see what type of relief we can get. I don't imagine that it would be through the IRS and Treasury this time. I think they've done about all they can do. We'd really need some legislation to help us out."

Roth provision requires many to change

According to data from the Public Retirement Research Lab Database, a mere 2% of the 18,671 participants aged 50 or older were impacted by the original SECURE 2.0 Act provision. However, a staggering 55% of public-sector plan sponsors are potentially required to make significant plan administration changes to comply with the Roth requirement.

The data from 2021show 21% of participants aged 50 or older, earning more than $145,000, had contributed amounts exceeding the $19,500 limit in the previous calendar year. These individuals, constituting a relatively small share of all participants, were set to make Roth contributions under the initial SECURE 2.0 Act provision. This poses a challenge for nearly half of the public-sector retirement plans, impacting a considerable number of plan sponsors dispersed across various plans.

Relief for plan sponsors, administrators

The IRS notice announced a delay in the implementation of the Roth catch-up requirement until taxable years beginning after December 31, 2025. The IRS granted an administrative transition period for the first two taxable years beginning after December 31, 2023.

The delay allows for a more measured and strategic approach to the integration of Roth contributions into public-sector retirement plans, the IRS said.

As plan sponsors gear up for the transition period, industry experts recommend comprehensive communication strategies to educate affected participants about the impending changes.

While the original provision aimed to align retirement savings with evolving financial landscapes, the delay allows for a more thoughtful and deliberate approach to implementation, according to the Employee Benefit Research Institute. As the industry prepares for this transition period, collaboration between plan sponsors, administrators, and participants will be essential to navigate the complexities of this significant change in the retirement savings landscape, EBRI said in a statement.

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].