The Evolution and Implications of Roth Features in Retirement Plans

The Evolution and Implications of Roth Features in Retirement Plans

In 2001, Congress introduced a significant change to retirement planning by adding section 402A to the Internal Revenue Code (IRC), allowing 401(k) plans to incorporate a "qualified Roth contribution program." This amendment, effective from 2006, enabled participants to classify their elective deferrals as Roth contributions. By 2022, Congress further revised the IRC to amplify the likelihood of Roth features in retirement plans, thus accelerating the "Rothification" of these plans. While this expansion offers excellent tax planning opportunities, it also introduces complexities in plan design, compliance, and administration.

The Introduction of Roth Contributions

The concept of Roth contributions was first brought to life through the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). This was a groundbreaking idea at the time, as it diverged from the traditional method of after-tax contributions. Historically, plans permitted after-tax contributions, where participants paid taxes on contributions upfront but deferred taxes on investment earnings until distribution. Roth contributions differed significantly; participants paid taxes on contributions in the current year but enjoyed tax-free investment earnings on qualified distributions.

Following EGTRRA, plan sponsors and their advisers faced critical decisions. They had to determine whether to amend their plans to include Roth contributions and how to effectively communicate the benefits of Roth versus pretax elective contributions. Additionally, sponsors needed to establish administrative procedures in collaboration with service providers to ensure compliance with section 402A and related regulations. Participants and their advisers, on the other hand, needed to assess whether some or all of their elective deferrals should be designated as Roth contributions. While these decisions were complex at the time, they are now overshadowed by the intricacies introduced by recent legislative changes.

SECURE 2.0 and Its Impact

On December 29, 2022, the Consolidated Appropriations Act, 2023, was enacted, which included amendments to the IRC and the Employee Retirement Income Security Act (ERISA) provisions related to retirement plans. This set of provisions, often referred to as "SECURE 2.0," builds on the Setting Every Community Up for Retirement Enhancement Act of 2019. SECURE 2.0 brings substantial changes to how plan sponsors and participants can utilize Roth features in their 401(k) plans and other retirement plans.

One notable amendment under SECURE 2.0 allows defined contribution plans to include emergency savings accounts with more lenient distribution provisions than those for other contributions, but only Roth contributions are allowed for these accounts. Additionally, SECURE 2.0 mandates that all catch-up contributions to a plan must be Roth contributions unless the participant earned less than $145,000 in the previous year. This effectively means that to offer emergency savings accounts or allow catch-up contributions, plans must either include or be amended to include a qualified Roth contribution program. This is a significant shift from the initial introduction of Roth features under EGTRRA.

SECURE 2.0 further incentivizes the incorporation of Roth features by allowing plans to permit participants to elect to have their employer matching and nonelective contributions made as Roth contributions. This expansion significantly enhances participants' ability to pay taxes upfront to avoid taxation on retirement benefits later. Additionally, amounts in a participant's Roth contribution account and related investment earnings are now exempt from the required minimum distribution (RMD) rules.

Challenges and Opportunities

The amendments brought by SECURE 2.0 are expected to drive many plan sponsors to add or expand Roth features in their retirement plans. However, this transition will not be immediate, as there are unresolved questions regarding how the Treasury Department and IRS will interpret these provisions. Furthermore, payroll providers, recordkeepers, sponsors, and others will need to make substantial modifications to their technology, policies, and procedures to comply with the forthcoming regulations and guidance.

Participants will also need considerable assistance to understand the tax implications of these changes. Consequently, legal, financial, and other advisers will play a crucial role in helping sponsors and participants navigate these new complexities in the coming years.


The evolution of Roth contributions, from their inception under EGTRRA to the extensive changes introduced by SECURE 2.0, reflects Congress's commitment to enhancing retirement savings strategies. While the increased "Rothification" of retirement plans offers significant tax planning benefits, it also demands careful consideration and adaptation from plan sponsors, service providers, and participants. The upcoming years will be crucial for stakeholders to align with new regulations, optimize plan designs, and fully leverage the opportunities presented by these legislative changes.