Government Sponsors Say Payroll Systems Are Main Obstacle to Roth Catch-Ups

Governmental plans are making progress towards adopting mandatory Roth contributions for catch-ups, now delayed to 2026, but more work and more guidance from the Internal Revenue Service are needed.

In August, the IRS delayed implementation of Section 603 of the SECURE 2.0 Act to 2026 from 2024. Section 603 requires those making $145,000 or more (indexed) to make their catch-up contributions to a Roth source, starting in 2024. It applies to 401(k), 403(b) and 457(b) plans. This provision was intended to be a revenue raiser for the legislation by reducing the income that is deducted through contributions to a pre-tax account.

Almost immediately, industry organizations representing for-profit, nonprofit and governmental plans began advocating for a delay in Section 603’s implementation. Many plans do not offer Roth options and need to update their systems to flag incomes at or above the limit to be sure they are in compliance.

This problem is particularly acute for governmental plans, which tend to have more complicated and less centralized payroll systems, and in many cases require updates to state legislation and collectively bargained labor contracts in order to make the necessary changes.

Payroll and Recordkeeping

David Levine, a principal and co-chair of the employers and sponsors group at Groom Law Group, says “it’s the complexity with governmental plans” that makes Section 603 so much harder to implement, specifically their payroll systems. Many governmental plans have “hundreds of different payroll systems,” he says.

Roth is more than an account type, Levine explains, it is also a payroll item. A governmental plan might include many different payrolls, from police and schools to multiple municipalities all under one plan. Unifying all this data into one plan is a challenge for them and is “a huge lift,” he says.

Matt Petersen, the executive director at National Association of Government Defined Contribution Administrators, says that “income verification continues to be an obstacle for all plans, but especially state plans with multiple governments participating. Many state plans allow any political subdivision in the state to participate. Each smaller government typically has its own payroll system, and all those systems would have to be updated to identify employees making a salary over the $145,000 limit.”

Petersen says that this will be difficult for some government sponsors to handle, largely because “many states have well over a thousand governments in their plan.”

Perhaps more than anything else, governmental plans want and need “final guidance that recognizes the uniqueness of government plans,” Levine says, noting that the guidance would have to account for the payroll and recordkeeping challenges that such plans have.

Petersen says that many are “interpreting the law to imply that incomes within the same plan system would have to be aggregated” for the purposes of calculating the income threshold. Petersen cites an example of a professor who works for multiple schools within the same system and only makes $145,000 in aggregate. The IRS needs to clarify if this aggregation model is correct or if only the salary at the employee’s primary employer counts towards classification.

“Many plans are still in a holding pattern until we get answers to those questions,” Petersen says.

Greg Needles, a partner at Morgan Lewis, agrees and says “government plans should be engaging with IRS so that they have input into whatever guidance comes out,” and encourages the regulator not to take one-size-fits-all approaches on issues that affect government plans.

State Legislation, Union Negotiations

Another potential headache for government plans is the need for updates to state legislation. “Governments that need to enact legislation to add Roth options are working on that now, and none that I’ve spoken with foresee any difficulty in making the necessary legislative changes before the deadline,” Petersen says.

Levine agrees that state houses should not be an obstacle here and are expected to move in time for plans to adjust, though not every state has a legislation-related issue and those that do not can move forward without any reforms. In sum, Levine says legislative changes are not a widespread concern for his clients.

Needles adds that he also had not seen union contracts as an obstacle in his practice to government plans adapting to Section 603.

With state laws and union contracts progressing well, it would seem that payroll and recordkeeping are the key areas that government plans need to get a grip on the most.