2024 PS Webinar: SECURE 2.0 Catching Up with Catch-Ups

While the Internal Revenue Service announced a two-year administrative transition period for plan sponsors to implement Roth catch-up contributions for higher-income employees—a mandatory provision under the SECURE 2.0 Act of 2022—it is important that plan sponsors, recordkeepers and payroll providers are preparing to implement this new feature, as the deadline is not too far off.

Robert Massa, managing director and Houston Operations Retirement Practice Leader at Qualified Plan Advisors, said at Thursday’s PLANSPONSOR webinar “Catching Up with Catch-Ups” that his plan sponsor clients were “elated” about the delayed deadline, but many are now putting it off their radar as they have other responsibilities that are more pressing.

“What I’ve had to do is prioritize my clients to get [the catch-up requirement] back on their radar screens starting with those who do payroll internally,” Massa said.

Massa said it can take six months just to submit a request to get approval for a project like this. If an employer is just starting this process now, they essentially have one year to implement the Roth provision, which is scheduled to take effect for plan years starting after December 31, 2025.

Massa argued that the bulk of the implementation process needs to come from payroll providers. If a company’s catch-up contributions are currently operating on a pre-tax basis, payroll needs to work with a plan sponsor’s recordkeeper to figure out how it can be switched to a Roth contribution.

“You have to think about the logistics of how all this money will get remitted,” Massa said. “Normally, all money has its own bucket: pre-tax has a bucket, match has a bucket, Roth deferrals have a bucket, after-tax has a bucket. Will you put this catch-up into the Roth bucket [or] will the payroll company want to put it in a new bucket? There’s a lot of things that [payroll providers and recordkeepers] have to iron out together.”

A ‘Revenue Raiser’

Andy Banducci, senior vice president of retirement and compensation policy at the ERISA Industry Committee, explained why Congress originally set the due date for the mandatory provision to take effect after December 31, 2023.

When policymakers were negotiating the SECURE 2.0 package, Banducci said they needed to come up with almost $40 billion in new money in order to make the law’s outlays equal to new revenues. For example, Banducci said the provision making auto-enrollment mandatory for new plans – which takes effect for plan years beginning after December 31, 2024 — was predicted to cost $5 billion over the next ten years, and the Saver’s Match provision – effective after December 31, 2026 — was expected to cost around $10 billion, so therefore, Congress needed to come up with ways to offset those costs.

Banducci said requiring catch-up contributions for higher-income employees to be made on a Roth basis was the biggest revenue raiser of the bill, as almost $17 billion in new revenue is expected from it. Money that would have been put into retirement plans on a tax-deferred basis will instead be saved on a Roth, or after-tax, basis, resulting in more revenue for the IRS now.

“That explains why the date in the bill that was supposed to take effect was [initially] right away [on] December 31, 2023,” Banducci said. “Often those kinds of provisions would get a longer runway, but they needed [money] every year within that 10-year window.”

Members of the ERISA Industry Committee expressed right away that the original deadline was going to be a problem, and Banducci said they were told by their vendors that it would be difficult to implement so quickly. Therefore, in late August 2023, after significant lobbying and conversations with policymakers, the IRS announced the two-year administrative transition period.

Section 603 of SECURE 2.0 requires that catch-ups from participants in 401(k), 403(b) or governmental 457(b) plans earning $145,000 or more be made as Roth contributions.

Banducci said he does not think the limit will be adjusted to try to make up for lost revenues during the delay, but he said the next time a tax package is introduced and Congress needs to come up with revenue raises, it is possible that the limit could be adjusted.

Implementation Challenges

Brigen Winters, principal at Groom Law Group, said he does not think the two-year implementation delay will be extended beyond January 1, 2026, and that employers should take advantage of the delay to work on implementation issues.

“The problem that our clients were having, both sponsors and recordkeepers, is the new compensation limit using FICA earnings that payrolls are not tracking for retirement plan purposes,” Winters said. “The need for payroll to square up with plan administration… was going to be very challenging to implement on the timeframe that was in the original legislation.”

Winters said these challenges were coupled with the fact that a lot of plans do not currently offer a Roth option. He added that he has heard about requests to further delay the provision for governmental and multiemployer plans, as these plans tend to deal with longer processes in implementing any plan changes due to legislative barriers and collective bargaining practices.

The Rothification Trend

Winters added that this mandatory provision indirectly will result in more Roth accounts in plans and potentially more in-plan Roth conversions, which Congress looked at a few years ago as a potential revenue raiser. Massa said this could also trigger more organizations to consider offering back-door Roth conversions as an additional benefit.

Banducci said the idea of “Rothification” is not new, as the House Ways and Means Committee’s Republican staff put out a draft tax reform package in 2014 that had significant elements of Rothification in it.

“The idea of going after tax deferrals or tightening tax incentives around retirement savings is not new,” Banducci said. “[Policymakers] are starting to look at ways [to] generate new revenue without raising individual tax rates and the tax incentives around retirement are one of them, particularly given that they’re deferrals in this case.”

You can watch a recording of the full webinar here.