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Compliance July 19, 2023
Industry Group Says Roth Catch-Ups Too Burdensome for 2024
SECURE 2.0 rules expanding catch-up contributions into a Roth source will be a huge undertaking for sponsors and recordkeepers.
Reported by Paul Mulholland
The ERISA Industry Committee sent an open letter to the Department of the Treasury and Internal Revenue Service on Wednesday requesting a two-year delay in the implementation date for Roth catch-up contributions.
Section 603 of the SECURE 2.0 Act of 2022 requires that catch-ups from participants earning $145,000 or more be made as Roth contributions and takes effect on December 31, 2023. The ERIC letter requests that this be postponed to December 31, 2025, joining a request for more time from other industry groups such as the National Association of Government Defined Contribution Administrators and the American Benefits Council.
Unlike NAGDCA’s letters, which focus on the unique challenges faced by government plans, ERIC’s letter explains that Section 603 presents administrative issues for all DC plan sponsors.
The committee notes that the $145,000 threshold is not tied to any other number commonly used by DC plans and is not even consistent with the highly-compensated-employee figure, currently set at $150,000 for 2023. That will create an administrative burden, as recordkeeping methods have to be updated, and employers are often unaware of whose salary will fall above or below this limit until after filing W-2 tax forms.
In NAGDCA’s letters, the association notes that tracking compensation is further complicated by employees who work for more than one employer within a network, such as at multiple state universities, and by workers whose income can vary and is therefore unknown ahead of time.
ERIC’s letter explains that recordkeepers currently use two methods to administer catch-up contributions. The first is an elective spillover election in which employee contributions that exceed the annual limit simply “spill over” into catch-ups. The second is a separate contribution election, in which contributions are added to regular and catch-up sources concurrently throughout the year and are reconciled at year’s end if the participant did not actually exceed their annual limit.
Mandatory Roth designation will complicate the concurrent method, according to ERIC. If a participant elects a traditional source for normal contributions, the sponsor will have to add contributions to a Roth source concurrently, which would require additional recordkeeping and communication. If the participant does not exceed the limit by year’s end, the sponsor would have to move the catch-up amount back to the traditional account in a Roth-to-traditional conversion, which ERIC says most recordkeepers cannot currently accommodate.
ERIC’s letter joins a growing body of similar letters beseeching the Treasury Department to postpone Section 603 implementation. Mark Iwry, a nonresident senior fellow at the Brookings Institution and former deputy assistant treasury secretary for national retirement and health policy, said he is reasonably optimistic that the Treasury Department and IRS will agree to at least a one-year delay for the provision.
The letter is co-signed by Aon PLC, Empower, the Insured Retirement Institute, the Investment Company Institute, the Investment Adviser Association and the Teachers’ Retirement System of the City of New York, among others.
