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Expansion of Roth Contributions in Workplace Retirement Plans

Plan Sponsors should be aware that implementing these provisions requires significant updating of systems for employers, recordkeepers, and payroll providers. In December 2023, the Internal Revenue Service (IRS) released Notice 2024-02 which provides insight into how the retirement industry can effectively support the administration of these provisions.

Roth Employer Contributions
This optional provision gives employees the choice to have their employer contributions made to a designated Roth account, if their employer offers this option. These contributions are not subject to federal income tax withholding. To be designated as a Roth contribution, the employer contribution must be fully vested (nonforfeitable) when made.

While this provision is currently available, Plan Sponsors may be hesitant to adopt it due to the complexity of administration. However, younger participants may want to take advantage of the opportunity to pay taxes now and avoid higher rates later in their careers. It’s important to look at your workforce to determine if this optional provision would be a benefit to your employee population.

Roth Catch-Up Contributions
This mandatory provision requires participants with high incomes to make catch-up contributions to qualified retirement plans as Roth after-tax contributions. Employees with wages over $145,000 in the previous calendar year and who are age 50 or older will be required to make catch-up contributions as Roth. The $145,000 amount is adjusted for inflation. Participants will not receive tax deductions on those catch-up contributions, but they can withdraw the money tax-free.

The IRS delayed the effective date of this requirement until 2026 to allow plans time to change their administrative procedures. It may be good idea to remind participants to start planning now and encourage them to consult a trusted tax professional to determine the best way to maximize their retirement savings.

"Rothification" of Retirement Plans
Roth utilization within employer sponsored retirement plans has been increasing. In fact, from 2013 to 2022, the share of retirement plans that give employees a Roth option grew from 58% to 89%, according to AARP.

For the majority of workers, the decision whether or not to make contributions on a Roth or pre-tax basis comes down to personal choice based on their current marginal tax bracket. However, starting in 2026, a select number of employees will be required to defer at least a portion of their contributions on a Roth basis. If you have any questions about the optional Roth employer contributions or the upcoming mandatory Roth catch-up contributions and how they may affect your plan, please contact your Spectrum representative.