Roth Method Catch Up Contributions
This article was originally featured in the August 2023 issue of The Monitor.
During consideration of the 2017 tax legislation by the Senate Finance Committee, then-Chairman Orrin Hatch (R-UT) released a list of potential amendments to the bill that members of the Committee were interested in offering at the upcoming markup. One amendment listed by the Chairman himself would have subjected all catch up contributions to the Roth method, i.e., after-tax contributions and tax-free distributions.
The amendment was never offered. By the time the markup took place there was a distinct loss of appetite on imposing the Roth method. Months earlier, the House Ways and Means Committee was close to mandating the Roth method on most contributions to defined contribution plans, but then-President Trump upended the effort by publicly declaring his opposition to it.
However, legislative proposals never really die in Washington. They just get put on the shelf for a future, more opportune time to be taken down, dusted off, and reintroduced. Such is the case with the Roth method and its application to catch up contributions. Last year, Congress approved, and President Biden signed into law the SECURE Act 2.0. As enacted, the Act requires individuals who made more than $145,000 in the previous calendar year to use the Roth method for all catch up contributions to 401(a) qualified plans, 457(b) governmental plans, and 403(b) plans. The provision is effective for years beginning after December 31, 2023.
This abrupt effective date does not provide a reasonable amount of time for retirement plans to make the change. Some public and private sector plans do not have a Roth option and now must create this feature. Public sector plans have the additional burden of having to amend their plans, which are often found in state statutes, by new law approved by their legislature and signed by the governor. In recognition of this burden, previous legislative and regulatory changes have provided additional time for governmental plans to come into compliance. Unfortunately, the SECURE Act 2.0 with its over 90 separate tax law changes, each of which with its own unique effective date, does not provide a universal extended effective date for governmental plans.
NCPERS has joined its public and private sector allies in writing several letters to the U.S. Treasury Department and the Internal Revenue Service requesting a delay in the effective date. Moreover, a recent comment letter by the New York City Bar Association's Committee on Employee Benefits and Executive Compensation outlined numerous detailed questions on the implementation of the Roth catch up requirement.
While no official government response has been made, we remain hopeful that Treasury-IRS will provide a delay in the enforcement of the Roth catch up changes. NCPERS will be certain to keep its members up to date on any developments in this area.
About the Author: Tony Roda is a partner at the Washington, D.C. law and lobbying firm Williams & Jensen, where he specializes in legislative, regulatory, and fiduciary matters affecting state and local pension plans. He represents the National Conference on Public Employee Retirement Systems and state-wide, county, and municipal pension plans in California, Colorado, Georgia, Kentucky, Ohio, Tennessee, and Texas. He has an undergraduate degree in government and politics from the University of Maryland, J.D. from the Catholic University of America, and LL.M (tax law) from the Georgetown University Law Center.