Key Takeaways

• Starting next year age 50 catch up contributions will need to be made as after-tax Roth for those employees earning $145,000 or more.
• Some challenges remain with properly implementing this new rule in a timely manner. For example, how will it be administered in the payroll system and by plan service providers.

Employers can offer employees who are age 50 or older the opportunity to make additional catch-up contributions to their retirement plans. An optional feature in a 401(k) or 403(b) Plan, this is a great way for older workers to save more money, an extra $7,500, for up to $30,000, this year. In fact, studies suggest that as many as 98% of plans offer catch-up contributions.

Starting 2024, those catch-up contributions will need to be deducted and deposited into after-tax Roth accounts for employees who earned more than $145,000 in the prior year. This change is part of the SECURE Act 2.0 that Congress passed into law in December of 2022. And this does bring some challenges which we discuss below. Let’s first start with the benefits of Roth.

Roth has advantages

The most obvious difference between a traditional pre-tax account and after-tax Roth is how each account deals with taxes. A traditional account offers an upfront tax break: Contributions may be deductible in the year they are made to the account. When you pull money out of a traditional 401(k) or 403(b) in retirement, you owe income taxes.

With the Roth, one must wait longer for the tax-savings payoff. But it’s worth it, especially for those who anticipate their tax rate will be higher later than it is now.

If you take care of your tax tab upfront — funding the account with post-tax dollars (remember, Roth contributions are not deductible) — as far as the IRS is concerned, its business with you is complete. When you start making withdrawals in retirement you owe nothing — not even for the earnings on your investments. The money is yours, free and clear.

Challenges faced by employers and service providers

Though the change is set to kick in Jan. 1, some organizations and service providers say they need more time to meet the logistical challenges of identifying who earned more than $145,000 the previous year and retooling payroll and other systems to ensure their catch-ups go into a Roth. Who will administer this $145,000 limit? Who will ensure deduction is being made as Roth?

Two-year delay possible

Over 200 organizations recently wrote a letter to Congress asking for legislation to delay the new requirement for two years. In the letter, the groups explained that appropriate systems do not yet exist and cannot be implemented within a year to instantly coordinate payroll systems with plan recordkeeping systems to ensure compliance with this new rule before it becomes effective in 2024. If some relief is not granted, many plan sponsors will be, as a practical matter, forced to eliminate all catch-up contributions in their retirement plans, at least until they get updated systems in place.

What’s next

At this time we’re waiting for further guidance from the IRS and other government bodies. And although we don’t know if we are going to get a two-year delay, planning and preparation are key. If your retirement plan currently doesn’t allow Roth, you should discuss with your external retirement plan team (retirement plan specialist, financial advisor, recordkeeper, payroll provider) if adding the option to your plan makes sense now. And if you already have Roth, however, discuss with your retirement plan team on how to best implement this new feature. While some organizations and plan providers say they need additional time to meet the new requirements, others are working on a manual process as a backup plan so they can continue providing catch-up contributions to employees.