SPARK Meeting Addresses Roth Catch-Up Preparedness

A retirement industry workshop on SECURE Act 2.0 of 2022 implementation held by the SPARK Institute sought to bring clarity and coordination for retirement recordkeepers and payroll providers as they prepare for new Roth catch-up provisions and so-called “super-catch-up” contributions.

In the July 16 meeting, SPARK, the Society of Professional Asset Managers and Recordkeepers, brought providers to Vanguard’s offices in Valley Forge, Pennsylvania, in person and virtually. About 150 recordkeepers, payroll providers and Employee Retirement Income Security Act experts attended, with most of the focus on the catch-up provision for higher-earning participants, while the super-catch-up for people aged 60 through 63 was discussed more briefly, according to Tim Rouse, the executive director of the SPARK Institute.

“We had great participation from recordkeepers and payroll providers,” Rouse says. “Now we can reassure plan sponsors that both industries have worked together, and we believe we’ve got it worked out for them.”

Rouse says the institute called the meeting to focus on the SECURE 2.0 Roth provisions due to plan sponsors “raising concerns” about the coordination required between recordkeepers and payroll providers to implement them.

The higher-contributor catch-up provisions got early attention from the industry as a potentially tricky area to implement. Under Section 603(c) of the SECURE 2.0 Act of 2022, plan catch-ups from participants in 401(k), 403(b) and 457(b) plans earning at least $145,000 in the prior year are required to be made on a Roth, after-tax basis. However, widespread industry response that this would not be possible to implement quickly prompted the IRS to push that timing out to 2026.

The super-catch-up provisions, meanwhile, kicking off in 2025, offer higher catch-up capabilities for workers aged 60 through 63, up to either $10,000 or 150% of the regular catch-up amount per year, depending on which is greater.

Some specifics that emerged from the workshop, according to SPARK, included the workflow between payroll providers and recordkeepers. The group that attended the meeting also sought to address a concern about tax filing corrections. Rouse explains that a person’s income level for a given year can and “often does change,” meaning an individual who was thought not to be part of the Roth catch-up population may ultimately be in it.

“It could be weeks or months until the recordkeeper finds out that the taxpayer’s previous year income was over the $145,000 amount,” Rouse notes. “In our view, the easiest way to fix the problem is to back out the withdrawal from the incorrect catch-up contributions, with earnings, and to issue the taxpayer a 1099-R for the next year.”

To that end, SPARK filed a letter to the IRS and the Department of the Treasury on August 27 making that recommendation.

Other details of the discussions included:

For the Roth catch-up (Section 603 of SECURE 2.0):

• Participant Identification and Reporting: Payroll providers will report the Roth catch-up population to plan sponsors, who will then inform recordkeepers; the group emphasized flexibility in reporting arrangements and timely data;
• Threshold Calculations: Payroll providers will enforce the new Roth catch-up rules, ensuring contributions do not exceed IRS limits, with recordkeepers providing secondary validation;
• Reconciliation of Contributions: Misapplied pre-tax contributions will be corrected via 1099-R, pending a final decision by the IRS on how such corrections should be addressed;
• Automatic Conversion to Roth: Shifting contributions from pre-tax to Roth will be carefully managed to avoid an inconsistent participant experience; and
• Control Groups: Plan sponsors will need to identify cases when employee movement changes their eligibility for the catch-ups, alleviating concerns for payroll providers and recordkeepers.

Super-Catch-Up (Section 109 of SECURE 2.0):

• Adoption Strategy: A unified approach for implementing super-catch-ups (with most recordkeepers choosing to implement automatically) and providing an “opt-out” strategy for plan sponsors; and
• Threshold Calculations: Payroll providers will enforce super catch-up calculations, with recordkeepers providing secondary validation to ensure compliance.

SPARK has another SECURE 2.0-focused meeting coming up next month. On September 20, the group will host a meeting of industry players in Chicago at Alight’s offices and virtually. That meeting will focus on the Saver’s Match federal benefit and the DOL’s lost-and-found program.

Rouse notes that the Saver’s Match has the potential to bolster retirement savings for millions of lower-income participants. But if the setup is not simple enough, it may not get off the ground.

“Our industry very much wants this to be successful, but it’s a plan feature, and the plan sponsors will have to adopt it as a plan feature for plan sponsors that is easy to implement,” he says. “If recordkeepers turn up their nose at it, then plan sponsors will not put it in their plan.”

IRS SECURE 2.0 Reminders

In other SECURE 2.0 news, the IRS on Thursday issued a reminder to businesses about filing W-2 forms for the 2023 tax year and beyond.

In a fact sheet, the IRS points to three areas in which SECURE 2.0 makes available certain provisions for employer-sponsored plans that should be accounted for in employee W-2s.

One relates to “de minimis” (small) financial incentives (Section 113 of the SECURE 2.0 Act), which employers may offer to employees for choosing to participate in a plan: Those incentives are considered part of income.

The second concerns Roth SIMPLE and Roth SEP individual retirement accounts (Section 601 of the SECURE 2.0 Act). These provisions allow plans to provide plan participants the option to designate a Roth IRA as the IRA for contributions and an employer match. Salary reductions for participants to these Roth options are subject to federal income and other taxes; employer matching and nonelective contributions to them are not subject to withholding for federal income and other taxes.

Finally, the IRS addressed the optional treatment of employer nonelective matching contributions as Roth contributions (Section 604 of the SECURE 2.0 Act). These contributions are not subject to withholding for federal income tax and generally are not subject to withholding for Social Security or Medicare tax.