Government Plans Face Unique Challenges With SECURE 2.0 Implementation

Catch-ups for those aged 60 to 63 and a mandatory Roth source for HCE catch-ups will be problematic for many, but especially for government plans.

The National Association of Government Defined Contribution Administrators Inc. published an open letter today to the U.S. Department of the Treasury which requests regulatory guidance and clarification on provisions in the SECURE 2.0 Act of 2022 that affect government plans.

Most notably, the letter asks for more time for government plans to comply with Section 603 of the SECURE 2.0 Act, perhaps its most infamously complicated provision. Section 603 requires the enhanced catch-up contributions for participants ages 60 through 63 to be made using after-tax dollars to a Roth account if the participant is a highly compensated employee, starting in 2024.

This provision is even harder to implement for government plans. For one thing, many government plans don’t have a Roth offering. Matt Petersen, executive director of the NAGDCA, estimates that approximately 20% of government plans do not have a Roth feature and would need state law and collective bargaining agreements to be updated in order to add one.

Many states have very short legislative sessions and will not be in a position to update state statutes to enable Roth contributions. Collectively bargained contracts with labor would also have to be renegotiated in order to add Roth features into their retirement plans. State plans can also struggle to verify payroll information in order to verify who is a HCE and who is not.

Petersen says many government retirement plans are planning to suspend catch-up contributions entirely as a temporary solution until they are able to come into compliance with Section 603. This would require them to cancel catch-ups and communicate that to participants, then restart them in a year or two and communicate that change as well. Petersen notes the irony of plans suspending catch-up contributions, saying the “purpose of this law was to enhance retirement security.”

David Stinnett, a principal and head of strategic retirement consulting at Vanguard, previously told PLANADVSIER that this would be a temporary fix considered in the private sector as well, especially for plans that do not already offer Roth contributions.

Additionally, many governmental plans are multiemployer plans. This means that the state plan will have to implement the changes across many different local and state employers, which is especially challenging for those who completely lack a Roth offering.

An additional complicating issue is that in drafting SECURE 2.0, Congress accidentally wrote out catch-ups entirely with an overlooked technicality in the wording of the legislation, first identified by the American Retirement Association. The NAGDCA recommends the IRS issue guidance that codifies the legislative intent in anticipation of a future Congressional fix.

The NAGDCA also asked for a good-faith exemption for retirement plans that accidentally believe an employee is not an HCE and therefore allow them to contribute their age-60 catch-up contributions into a pre-tax account, when in fact they are a HCE. Petersen explains that a participant in a government plan may be employed by more than one employer in the plan and have an aggregate income in excess of the threshold compensation level of $145,000, but the individual employers are unaware of this, since they both pay the participant less than $145,000.

As an example, Petersen describes a college professor who lectures at multiple universities in the same retirement system and contributes catch-ups pre-tax because those universities are unaware that the professor’s combined income is higher than $145,000. The letter asks that “the IRS will honor reasonable, good faith compliance” with this provision.