Industry Concerns About Roth Catch-Ups Escalate

Section 603 of SECURE 2.0, which would require catch-up contributions made by participants earning $145,000 or more to be made to a Roth source, has earned a reputation in the retirement industry for being a pain in the neck.

The provision is mandatory and becomes effective in 2024.

The National Association of Government Defined Contribution Administrators has penned two public letters since March to the Department of the Treasury asking that government plans be given more time to comply with Section 603. NAGDCA argues that many government plans do not even have a Roth feature, and many will need state laws and/or union contracts to be updated in order to comply with Section 603.

NAGDCA announced Thursday that it will sign a draft letter written by the American Benefits Council, the trade association that advocates for employer-sponsored benefit plans. The letter, which has not yet been sent, is different from those sent by NAGDCA in recent months because it is addressed to congressional leaders and asks for a legislative fix, rather than a regulatory one. It begins by saying, “The undersigned organizations commend you for your leadership in enacting the SECURE 2.0 Act of 2022,” suggesting the ABC anticipates others signing on.

The ABC letter implores Congress to pass legislation postponing the implementation date of Section 603 by two years to 2026. It also requests that plans that require updates to state laws or collective bargaining agreements be given additional time to do so on top of the two years, if necessary.

Mark Iwry, a nonresident senior fellow at the Brookings Institution and former deputy assistant Treasury Secretary for national retirement and health policy, speaking Thursday at the PLANSPONSOR National Conference in Orlando, Florida, called the provision in question a “plan sponsor focal point.”

He and certain plan sponsors at the event cited vast implementation challenges caused by the provision that affect not only plan sponsors, but also recordkeepers, payroll service providers and plan administrators. Iwry said he was reasonably optimistic that the Treasury Department and IRS would agree to at least a one-year delay for the provision.

The ABC letter states bluntly that if Congress does nothing, many plans will simply have to cancel catch-up contributions entirely as a temporary compliance solution: “For many of these plans, unless this requirement is delayed very quickly (i.e., this summer), their only means of compliance will be to eliminate all catch-up contributions for 2024. If a delay is not announced until, for example, the fourth quarter, it will be too late to prevent this adverse result, since compliance systems need to be designed well before the effective date.”