Two of the hot topics in the SECURE 2.0 legislation are two provisions related to after-tax Roth-type savings. In this two-part blog series, we’ll cover each provision one at a time. The first provision is mandatory and provides that catch-up contributions for individuals making over $145,000 must be after-tax Roth contributions.
If a plan currently does not allow Roth contributions, then participants making over $145,000 will not be able to make catch-up contributions. Plans without the Roth savings option may want to consider adding it, although this can be an added administrative burden for the plan sponsor. Plans adding Roth savings would need to amend their plan and update enrollment materials and payroll remittance files. They should also inform and educate participants on the new savings option. Plan sponsors seeking to add this provision should contact their recordkeeper to understand their plan for administering the new provision and what actions need to be taken by the plan sponsor.
Plan sponsors should still check with their recordkeeper and payroll provider to confirm how this provision will be administered for plans that currently offer after-tax Roth contributions. The $145,000 is based on the prior year’s salary, so it needs to be clear who is monitoring this. The definition uses FICA wages, which may be different than the definition of compensation used by the plan. The mechanism to possibly change from pre-tax to after-tax contributions must also be clarified.
There is concern from plan sponsors and recordkeepers as to whether the administrative provisions will be in place when this takes effect on Jan. 1, 2024. Several recordkeepers are seeking additional guidance and are considering lobbying Congress to pass legislation extending the effective date. This is also a concern for large governmental plans that do not have a Roth option or where the governmental plan is bound by state laws or union contracts that would need to be updated to include the catch-up feature. The National Association of Governmental Defined Contribution Administrators (NAGDCA) penned a letter to the Department of Treasury benefits tax council noting that many governmental plans will not be able to comply with the current effective date. At this time, we recommend plan sponsors continue working under the assumption that the Jan. 1, 2024 date will hold.
In addition, nearly 200 corporations, law firms and advocacy organizations (including most major recordkeepers) have signed a letter to House Ways and Means Committee requesting a two-year delay of this provision. Their concern is that plan sponsors who cannot adopt Roth or properly monitor the provision would have to eliminate the opportunity for participants to make catch-up contributions.
Watch for our second blog in this two-part series coming soon, diving into the second optional Roth provision, which would allow sponsors to offer non-elective or employer-matching contributions as after-tax Roth contributions.
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