‘Roth’ SECURE 2.0 Provisions Threaten Retirement Plan Catch-Ups

The short-term funding method Congress used to pay for its massive workplace retirement access law late last year has left employers confused and prodding regulators for relief.

“Roth” provisions, which require post-tax rather than pre-tax retirement contributions, are littered throughout the SECURE 2.0 Act (Pub. L. No. 117-328) in sections related to contributions by high-income workers near retirement, employer matches, and even the simple individual accounts—unlike 401(k)s—that have historically avoided complex tax calculations.

This “Rothification” of SECURE 2.0 has introduced a host of unanswered compliance questions and left the IRS scrambling to clear things up before some new provisions take effect next year. Chief among those concerns is an employer mandate that catch-up contributions that high-income workers make to boost their account balances near retirement be made solely on a Roth basis.

It’s a radical move affecting “every single defined-contribution plan in the country,” said Michael Hadley, a partner at Davis & Harman LLP in Washington. Using Roth has always been optional, plus wage calculations will take careful collaboration between companies’ third-party platforms, he said.

“This is the provision in SECURE 2.0 causing the most angst and anxiety among employers and providers,” Hadley said. “I think the Treasury Department understands that if their first piece of guidance doesn’t address this, that there will be riots in the streets.”

Lawmakers often levy taxes up front on legislation that’s intended to encourage more Americans to save, according to benefits advisers and interest groups.

But most workplace retirement contributions are taxed when they’re distributed, so the government can’t record them as incoming revenue in the short, 10-year window it uses to score the financial impact of new legislation.

“Very often when we improve the retirement system, it costs the government money in the short term,” Hadley said.

Pressure Mounting

Several retirement industry trade groups have filed letters with the Treasury Department identifying SECURE 2.0’s Roth provisions—notably the catch-up confusion—as the agency drafts its 2023-24 Priority Guidance Plan (Notice 2023-36).

Treasury officials, meanwhile, have been making the rounds at spring policy forums and trade conferences to ease fears about a quickly narrowing compliance adjustment window. They’ve hinted at potentially issuing a “grab-bag” notice with temporary or partial guidance to give employers and plan providers time to retool their systems before 2024 benefit elections.

Congress has given the agency a monumental task, said Carol Buckmann, a founding partner at Cohen & Buckmann PC in New York.

“The problem with all of this is that we don’t know how it works,” she said. “We don’t have any precedent.”

Roth catch-up contributions are triggered under SECURE 2.0 when a worker makes $145,000 a year in taxable income. That’s unusual because the tax code usually segregates workers not by their direct income, but according to whether they meet the definition of a highly compensated employee under annual nondiscrimination tests.

Tagging workers’ catch-up category to their yearly income requires buy-in from both payroll providers and 401(k) recordkeepers—systems that don’t always talk.

“The significant operational challenges posed by this provision argue for transition relief so that plan sponsors can work with recordkeepers to develop and update systems to implement these requirements,” ERISA Industry Committee President and CEO James Gelfand wrote in a letter to the Treasury Department June 8.

Personal Decision

Roth deferrals in defined-contribution plans such as 401(k)s, 403(b)s, and 457 governmental plans are optional. That means some employers are eyeing the SECURE 2.0 catch-up provision not only as a mandate on when to tax contributions, but also as a guide for designing their plans.

Adding Roth accounts means revising plan documents and communicating with participants about how to use post-tax contributions wisely.

Whether to save for retirement with pre-tax or post-tax revenue is a personal decision that should be hinged on a worker’s current tax bracket and which one they expect they’ll be in later in their careers, Hadley said.

“It’s a big deal for a plan to add a Roth, let alone administer it,” he said.

Some benefits advisers fear plans that don’t already offer Roth options may ditch catch-up contributions entirely to avoid complications under the system of taxing them, which is “exactly the opposite” of what Congress intended, Buckmann said.

The American Benefits Council has called on the IRS to delay implementing the SECURE 2.0 catch-up provision in order to prevent many participants from losing their ability to secure enough retirement savings at the end of their careers.

Employers soon will face a real decision about whether they can add Roth accounts in enough time for the 2024 plan year or eliminate catch-up contributions as an option, the group said in a June 7 policy statement.

“The Council has 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 group said.