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Administration August 30, 2023
NAGDCA Provides Roth Catch-Up Guidance for Government Plan Sponsors
Experts from Groom Law Group and NAGDCA noted in a webinar clarifying points from the IRS’s notice that may allow some participants to skip the Roth election.
Reported by Remy Samuels
Off the heels of the IRS announcement that plan sponsors are allotted a two-year administrative transition period to implement Roth catch-up contributions that were mandated in the SECURE 2.0 Act, the National Association of Government Defined Contribution Administrators discussed additional guidance that the IRS is considering and what this may mean for government employers.
During a webinar hosted by NAGDCA on Wednesday, Brigen Winters, principal at Groom Law Group, clarified that employers can allow catch-up contributions on a pre-tax basis until 2026, if the plan does not currently offer a Roth, and the plan will still be considered compliant.
This guidance, however, does not change the law, and Winters said employers should expect that the Roth requirement will begin in two years, as it is seen as a “revenue raiser” for the IRS.
In addition to the catch-up contribution guidance, the same IRS notice signals further guidance on certain issues that have been raised by plan sponsors, service providers and practitioners. According to the panel, these include:
1. Participants With No Prior-Year FICA WagesSection 4 of the notice addresses questions that have arisen about treatment of individuals who have no prior-year FICA wages from the employer or sponsor, according to panelists.
FICA, or the Federal Insurance Contributions Act, is a U.S. federal payroll contribution directed toward both employees and employers to fund Social Security and Medicare.
However, certain state or local government employees may not be subject to FICA taxes because they are covered by a qualified Social Security replacement plan.
David Levine, a partner at Groom Law Group, said the IRS is considering allowing employees, who are not subject to FICA, a pass on making Roth catch-up contributions.
“For [employers] who don’t have Roth or don’t feel comfortable providing a Roth for people making over $145,000, you might have a pass here,” Levine said.
2. Plan-Designated Roth Catch-UpsAnother question that has arisen is whether a plan can automatically “override” an employee’s pre-tax catch-up election and designate it as Roth, regardless of if the employee designated the contribution as such.
The law currently requires that the Roth designation be made by the employee at the time of the deferral election. This raises issues for plans that automatically treat contributions as catch-ups once they “spillover” the deferral limit, as well as plans that carryover deferral elections from year-to-year until changed by the employee, according to NAGDCA.
“There’s going to [need to] be an education discussion here especially for governmental plans that have a big employee base,” said Matt Petersen, executive director of NAGDCA. “People will see their paychecks drop if they’re [automatically] switch to Roth [catch-ups].”
The IRS expects that future guidance will allow employers to treat a pre-tax catch-up election as a Roth election for affected participants, Peterson said.
3. Applications to Plans Maintained by More Than One Employer
According to the SECURE Act, prior-year FICA wages are taken into account only from the employer sponsoring the plan.
This rule is straightforward when applied to a plan maintained by only one employer, but less so for multiemployer plans. Groom’s Levine said this is relevant to governmental plans, as they may have several employers within one system.
Future IRS guidance will likely clarify that wages do not need to be aggregated across participating employers within a single plan. Levine said this guidance would potentially take away a lot of administrative hurdles for government employers.
“Hopefully this guidance will specifically address FICA wages paid from participating (and non-participating) employers that are part of the same controlled group or affiliated service group,” NAGDCA wrote in a press release.
NADGCA will be submitting more comments to the IRS and encouraged government plan sponsors to let them know about any concerns or questions they have.
