When Congress passes sweeping retirement legislation, the details often come later\u2014and those details usually come in the form of regulatory spaghetti that plan sponsors and administrators are left to untangle. Case in point: the Roth mandate under Section 603 of SECURE 2.0. And now, the AICPA has weighed in, asking Treasury and the IRS to bring some order to the chaos.<\/p>\n
Let\u2019s rewind. Section 603 of SECURE 2.0 (part of the massive year-end legislation bonanza known as the Consolidated Appropriations Act of 2023) dropped a bomb on catch-up contributions for high earners. It mandates that catch-up contributions for certain participants be made on a Roth basis\u2014meaning after-tax. The proposed regs (REG-101268-24) issued in January gave us a start, but as usual, they left more questions than answers.<\/p>\n
That\u2019s where the AICPA comes in. In a July 1 letter, the organization asked for additional guidance, and frankly, they\u2019re not wrong to do so.<\/p>\n
Here\u2019s the crux of it: if you\u2019re 50 or older and earn over a certain threshold (currently $145,000 in wages from the current employer), your catch-up contributions must be Roth. The problem is, employers and plan providers need to know exactly how to determine who\u2019s subject to this rule and what counts as wages. And they need to know it before they\u2019re penalized for getting it wrong.<\/p>\n
Kristin Esposito, director of Tax Policy & Advocacy at the AICPA, said it well: \u201cPost-SECURE 2.0, employers and plan administrators will need clear guidance to ensure compliance of the law regarding Roth-mandated catch-up contributions.\u201d That\u2019s not just an understatement\u2014it\u2019s a polite way of saying \u201cthis is a hot mess and you need to fix it.\u201d<\/p>\n
One of the main asks from the AICPA? A safe harbor that lets plan sponsors rely on W-2 wage information to determine who\u2019s above the Roth threshold. That seems like a no-brainer. If we expect HR departments and payroll providers to cross-reference every dollar from predecessor employers or related entities, we\u2019re setting people up for failure. Not to mention the audit headaches that will follow.<\/p>\n
And speaking of related entities, the AICPA wants the IRS to clarify how disregarded entities are treated. For employment tax purposes, disregarded entities file with their own EINs and are treated like employers. But when it comes to determining who\u2019s the \u201cemployer sponsoring the plan\u201d under Prop. Regs. Secs. 1.414(v)-2(b)(3) and (4), the waters are murky at best. If you\u2019re a plan sponsor operating across multiple business structures, this guidance could mean the difference between compliance and noncompliance.<\/p>\n
Bottom line? The intent behind the Roth mandate may be noble\u2014getting more tax revenue now, simplifying retirement income later\u2014but implementation is another story. Without clarity, we\u2019re going to see a lot of errors, a lot of compliance risk, and a lot of unhappy plan sponsors.<\/p>\n
This isn\u2019t about dodging the Roth rule. It\u2019s about making it administrable. Plan administrators shouldn\u2019t have to be forensic accountants to determine who qualifies for a catch-up contribution<\/p>\n
and whether it needs to be Roth. And participants shouldn\u2019t be surprised by a tax treatment they didn\u2019t ask for and might not understand.<\/p>\n
So hats off to the AICPA for stepping in with practical suggestions. If Treasury and the IRS are smart\u2014and I hope they are, they\u2019ll take this feedback seriously and issue guidance that makes implementation smoother, not harder.<\/p>\n
Because the SECURE 2.0 Act was supposed to improve retirement security\u2014not trap employers and participants in a bureaucratic maze of unintended consequences.<\/p>\n
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