Advisers: Roth Catch-Up Extension Welcome, Clarity Still Needed

Retirement plan advisers had similar responses to the two-year extension for a mandate around Roth catch-up contributions: relief.

“Most of us in the industry were relieved because most of the payroll providers and administrators just weren’t ready,” says Susan Shoemaker, a principal and financial adviser with CAPTRUST Financial Advisers. “Some of the large providers were close to be being ready, but there are a lot of small payroll providers out there, along with a lot of providers doing things in-house that were finding it more complicated than they thought.”

The Internal Revenue Service announced Friday a two-year extension to a much-anticipated mandate required by SECURE 2.0 that retirement plan catch-up contributions made by higher-income participants in eligible defined contribution plans be designated as Roth. There had been widespread industry pushback on the rule going into effect at the end of this year, with providers and advisers noting administrative difficulties both among plan sponsors and recordkeepers.

Adviser Shoemaker says she alerted clients immediately after the announcement was made as she knew many human resources and payroll departments had been working hard to meet the looming deadline. Beyond just getting the setup right, plan sponsors were concerned that testing results for their plans may have failed due to errors, not to mention having to communicate with high-income earning participants about the change.

“You had three parties: the plan sponsor, the payroll provider, and the full-service provider (recordkeeper) having to communicate on something that was pretty complex,” she says.

When SECURE 2.0 came out with the initial Roth contribution mandates, advisory practices were a bit concerned about the burden on clients and the retirement system at large in terms of implementation in the timeline, says Craig Reid, the national practice leader of retirement and wealth for Marsh McLennan Agency, a subsidiary of Marsh.

“Changes like this take time to implement,” Reid says. “It’s a multiple step process and there’s more than just one decision to make, with impacts to various parts of the retirement plan….this gives some time for people to adhere to these administrative changes.”

Overall, the retirement advisory lead envisions using a Roth catch-up as a positive addition to a retirement plan, particularly as there is an increasing number of high-income earners compared to a few years ago.

“People know they are under-saved for retirement, so making that catch-up is important,” he says. “But now we no longer have to make a rushed decision in implementing it.”

A Big Relief

The extension was a “big relief across the board” considering that “we were going into the year in which the provision was required, but with no exact process from payroll vendors or recordkeepers,” Brent Sheppard, a partner and financial adviser with Cadence Financial Management, wrote via email.

Sheppard said the firm sent communications on the change and is discussing it in “every meeting” with plan sponsors. He noted that clients will likely take the additional year, at least, before implementing Roth.

“Most, if not all, of our plan sponsors will continue to operate as they have historically, and will switch to Roth catch up in 2025 when vendors will be fully ready to execute,” he wrote.

There are still kinks to be worked out, and plan advisers will continue to be looking for further IRS guidance, says Steven Grieb, senior compliance counsel, Gallagher Retirement Plan Consulting Practice.

“We’ve been working with clients, as well their recordkeepers and payroll providers, to do the best we can to ensure compliance before 2024, but there are a lot of open questions on this new rule,” Grieb says. “There’s some unpacking to do here.  We need to be proactive in making sure our clients understand what this means for them.”

Grieb says Gallagher will be advising most clients to take the time to hold off on implementing the Roth catch-up setup until more guidance is provided.

“We think it’s best to wait until we have a clear idea of the IRS’ position on a number of questions before making any changes to the plan design,” he says.

Grieb notes that the IRS’s Friday announcement also cleared up a technical error in SECURE 2.0 that had inadvertently banned any participant from making catch-up contributions at all. While most people knew that was going to change, it was still “nice to have that assurance from the IRS,” Grieb says.

Roth Lovers

Alvaro Galvis, who advises plan sponsors as senior vice president and wealth management adviser with Merrill Lynch Wealth Management, said via email that the extension was a relief so plan sponsors could “avoid a potential mistake” in implementation. He noted that, while he and his firm like the benefits of Roth, not all participants agree.

“Not many [highly compensated] employees leverage Roth,” Galvis wrote. “They mostly prefer to get a tax deduction. We love Roth, and so do our rank and file employees; but for some [highly compensated employees], this provision was going to cause some concern.”

Austin Gwilliam, senior vice president with GRP Financial, a division of Hub International, called the extension a “massive relief,” but noted that he will not be advising clients to start the Roth catch-up in the near-term.

“Payroll providers and recordkeepers still don’t even know how to accommodate this, so yes, this will be delayed,” he said via email. “Further guidance is months overdue.”

CAPTRUST’s Shoemaker says she was a bit surprised the IRS gave a two-year extension, as opposed to something later in 2024. But she had been “about 50/50” that regulators were going to offer some kind of grace period. She recalls the time in the industry when automatic enrollment was being added to plans.

“There were a lot of operational and administrative issues that arose,” she says. “And that was arguably less complicated.”