SECURE 2.0 changes to Roth accounts

The SECURE 2.0 Act of 2022 (“SECURE 2.0”) made important changes to Roth accounts in employer-sponsored retirement plans. Below, we break down three of those changes and what they could mean for you and your plan participants.

Roth catch-up contributions for high wage earners

Participants in 401(k), 403(b), and governmental 457(b) plans who have attained age 50 can make catch-up deferral contributions. For 2023, the age 50 catch-up limit is $7,500.

However, beginning in 2024, SECURE 2.0 requires a participant who has FICA wages exceeding $145,000 (indexed beginning in 2025) — considered a “high wage earner” — in the preceding year to make catch-up contributions on a Roth basis. Therefore, if a high wage earner makes a catch-up contribution in 2024, it must be a Roth contribution.

Some of the issues and questions raised by this new provision include the following:

• What if a plan does not allow Roth deferrals? If a plan does not currently allow Roth deferrals, then high wage earners cannot make catch-up contributions beginning in 2024. If high wage earners want to make catch-up contributions beginning in 2024, the plan must be amended to allow Roth deferrals for all participants.
• What about self-employed workers? The statute refers to FICA wages of more than $145,000. Self-employed workers (e.g., sole proprietors, partners in a partnership, and members of a limited liability company) do not have FICA wages. Therefore, the law does not appear to apply to self-employed workers. This is most likely a technical error that Congress is expected to correct later this year.
• Can employers require all catch-up contributions be made on a Roth basis? Although not clear, it’s unlikely an employer can require that all catch-up contributions — including catch-up contributions for participants earning $145,000 or less — be made on a Roth basis. However, IRS guidance is needed to confirm.

TECHNICAL CORRECTION NEEDED: When drafting the new Roth catch-up contribution rules for high wage earners, Congress inadvertently eliminated catch-up contributions (pre-tax or Roth) for all participants beginning in 2024. Congress is aware of this error and is expected to draft a technical correction reinstating the catch-up contribution provisions for 2024.

Roth employer contributions available

SECURE 2.0 also allows participants to elect to have employer contributions made on a Roth basis. This provision is optional; however, we don’t recommend adding this feature at this time for a number of reasons, including the following:

• How do participants make Roth elections? Many plans allow online deferral elections. However, recordkeeping systems are not set up to allow online Roth employer contribution elections. Programming changes (which have not happened yet) are needed to accommodate this feature.
• What happens if employer contributions are made on a pay period basis? Employers often make employer contributions — for example, matching contributions — on a pay period basis. In this case, IRS guidance is needed as to whether participants must be allowed to change their pre-tax and Roth elections throughout the year, or whether an employer, for administrative simplicity, can require pre-tax/Roth elections to be effective for the entire year.
• How are Roth employer contributions reported to the IRS? Roth employer contributions will be taxable and reported to the IRS. This taxable amount will need to be reported on a W-2 or a 1099-R. At this time, though, it’s not clear how Roth employer contributions must be reported, so further IRS guidance is needed.

In addition to the above questions, payroll and recordkeeping systems must be programmed to accommodate Roth employer contributions. This will take time, but there is a workaround: Participants interested in making a Roth employer election can achieve the same tax results by making an in-plan Roth conversion. If you have questions about whether your plan allows in-plan Roth conversions and/or want to add in-plan Roth conversion provisions to your plan, please contact your Union Bank Relationship Manager.

No lifetime RMDs from Roth accounts

Required minimum distributions, or RMDs, must be made from IRAs and employer plans during a participant’s lifetime. Under SECURE 2.0, participants typically must begin receiving lifetime RMDs from an employer plan at the later of age 73 or termination of employment.

Currently, lifetime RMDs are not required in Roth IRAs, but are required in employer plans. Beginning in 2024, lifetime RMDs will no longer be required from Roth accounts in employer plans, thus aligning with Roth IRAs. For example, assume a participant has pre-tax and Roth accounts in a 401(k) plan. The participant, age 75, retires in 2024. This means the participant must receive a 2024 lifetime RMD from the 401(k) plan. Under this new rule, the participant will not need to receive a lifetime RMD from the Roth 401(k) account. The participant will still need to receive a lifetime RMD from the pre-tax accounts.

We expect the IRS to issue further guidance on SECURE 2.0’s Roth provisions before the end of the year, and you can rest assured that we’ll keep you updated as that guidance is released. If you have any questions on how these new Roth rules apply to your plan, please contact your Union Bank Relationship Manager.