Compliance August 26, 2023

IRS Extends Roth Catch-up Contribution Deadline

The IRS extended the requirement by two years to 2026 so that any catch-up contributions from higher income earners must be designated Roth.

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The Internal Revenue Service released guidance Friday extending by two years a requirement under SECURE 2.0 that catch-up contributions made by higher-income participants in eligible defined contribution plans be designated as Roth.

The notice announced a two-year transition period for the requirement. Under section 603(c) of the SECURE 2.0 Act, the provisions of section 603 apply to taxable years beginning after December 31, 2023. However, the IRS noted, the first two taxable years beginning after December 31, 2023, will be regarded as an administrative transition period.

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The move comes after widespread retirement industry feedback that implementing the change for all defined contribution plan sponsors would be administratively challenging to get done by the original deadline. The ERISA Industry Committee had in a July letter requested a two-year extension for implementation, echoing calls by other groups including the National Association of Government Defined Contribution Administrators and the American Benefits Council.

Section 603 of the SECURE 2.0 Act of 2022 requires that catch-ups from participants in 401(k), 403(b), or governmental 457(b) plans earning $145,000 or more be made as Roth contributions.

Under the guidance released Friday those catch-up contributions, until 2026, will be treated as satisfying the requirements of section 414(v)(7)(A), even if the contributions are not designated as Roth contributions. Further, a plan that does not provide for designated Roth contributions will be treated as satisfying the requirements of section 414(v)(7)(B).

“The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) have been made aware of taxpayer concerns with being able to timely implement section 603 of the SECURE 2.0 Act,” the notice says. “The administrative transition period described in this notice is intended to facilitate an orderly transition for compliance with that requirement.”

The two year delay is a “practical, efficient, solution” for plan sponsors and service providers of all sizes and types, David Levine, principal and co-chair of the plan sponsor practice at Groom Law Group, said via email. 

“For those sponsors who did not have Roth contributions in the first place, this change is a huge relief that allows them to continue moving forward toward Roth implementation without the pressure and potential failures created by a hard January 1, 2024 deadline,” he wrote. “For governmental plans, the relief is also positive in an additional way with its focus on FICA wages for employers that don’t have FICA wages.”

NAGDCA expressed its appreciation for the two-year transition period.

“NAGDCA applauds the Treasury department and IRS for authorizing a two-year transition period on Section 603 of SECURE 2.0,” Matt Petersen, NAGDCA executive director, said in a statement.

“Leadership at both agencies engaged openly with us on the issue, and we felt our concerns were heard every step of the way. Today’s guidance is an excellent example of the results of an open, fair, and considerate process.”

Empower, the nation’s second-largest recordkeeper, also applauded the decision.

“[The IRS’s] action will help ensure an orderly implementation process and address concerns raised by plan sponsors,” Rich Linton, president and chief operating officer, Empower, said in a statement. “The defined contribution retirement system is a terrific example of a highly effective public-private partnership. The engagement between the industry and the government on this matter proves that we can and will work together to drive improvements to a system that so many Americans rely on to help foster their future financial security.” 

The IRS noted that it and the Treasury Department will be issuing future guidance regarding catch-up contributions for taxpayers. The notice also invites public comment and suggestions for the future regarding the mandates.

Full text of the guidance, including instructions on where to give comment, may be accessed here.

Data & Research August 25, 2023

Construction, Farming, Among Sectors with Lowest Retirement Plan Access

There is a role for financial advisers, accountants, and payroll providers to improve the plan coverage gap across industries, alongside shifting worker expectations and state mandates.

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Construction workers, farmers, and forestry employees are among the least likely workers to have access to a workplace retirement plan, according to analysis from small plan provider Guideline Inc.

The recently-published research, which draws from Bureau of Labor Statics’ data, found that, on average, about 72% of workers are offered retirement benefits as of the first-quarter of 2022, the most recent data available.

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Not all industries are created equal when it comes to workplace retirement plan access, however. Construction, extraction, farming, fishing and forestry clock in at the lowest rate of 65% plan access, as compared to management, business, and financial service businesses being most likely to offer a plan at 87%.

Blue collar industries and service jobs often have the lowest retirement plan benefit rates due to transitory workforces and roles with hourly pay, according to the Guideline analysis. But changing worker expectations, along with state mandates for retirement plans, could boost those rates in coming years, says Jeff Rosenberger, chief operating officer for the firm. 

“Worker expectations are changing,” Rosenberger says, noting that part of Guideline’s strategy is reaching small businesses in underrepresented fields. “Because of the state mandates and the labor market expectations across all industries, there is a greater expectation from workers that they would like access to a retirement plan.”

Rosenberger says state mandates are partly responsible, not just because businesses need to start offering plans, but because news of the mandates is driving interest from employees.

“Most workers are smart enough to know what really matters,” Rosenberg says. “Yes, they want higher compensation, but after that you are pretty quickly into things like, do I get paid time off, and then health insurance, and then retirement savings—usually in that order.”

Rosenberger sees a role for small business financial advisers, accountants, and payroll providers in improving the plan coverage gap across industries.

“In some cases, they know their industries really well, and they are all paying much more attention to retirement plans,” he says. “That is where there is a lot of energy and focus to better understand what is available to their clients.”

Sectors in Focus

Guideline’s research broke down both availability and participant rates for retirement plans by sector, which were both more likely among white collar professions. Roles in management, business, and finance not only provide a better chance to be offered a workplace plan, but employees also participate at the highest rate of 79%.

The second-best sector was professional services, such as teachers and nurses, which had an 87% offering rate and 74% average participation. The third-best sector participation was in protective services, such as fire fighters, police officers, and correctional officers, with a 78% chance of having the benefit, and a 66% participation rate. After that, office and administrative services came in fourth in terms of access at 77%, with average participation of 60%, according to the study.

From there, workplace offerings dropped below 75%. Fields such as production, transportation, maintenance, and sales all showed lower access as well as participation.

Rosenberger says that retirement plans, even if offered, may have less participation if workers are in the field all day, as opposed to being on computers. He says in this case, a mobile option for signing up, managing, and tracking retirement savings is important.

“For lots of the workforce, especially if they are field based, mobile is all you have,” he says. “You must meet people where they are, and that is the medium where more of them are. If you are in professional fields, you’re much more likely to be at a desk-based job and on a computer for many hours of the day—but that’s actually a minority of the workforce.”

Rosenberger notes that Guideline recently launched a mobile application for participants to access their platform.

When asked what industries Guideline sees as improving plan access, Rosenberg noted the restaurant and retail spaces in particular, two industries that have traditionally struggled with workplace retirement plan offerings.

“There’s a lot more interest from these industries,” Rosenberger says. “People who are working as waiters and servers at restaurants have been thinking about retirement plans and realizing they need to be saving.”

Rosenberger says state mandates are partly responsible, not just because businesses need to start offering plans, but because news of the mandates is driving interest from employees.

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