Secure Act Roth Catch Up requirement

[RaiCMC]

I just wanted to know if anyone is dealing with the same issue. We use Relius pre-approved IDP Volume Submitters Plan documents. Currently we have 100+ plans that don't allow for Roth 401k deferrals. We are trying to determine if we now have to force these plans to allow for Roth 401k because of the new rules (taking out the catch-up provision is not a route we want to go, we know this is an option to avoid the roth catch up). 

Currently there's no way to amend the FIS/Relius IDP VS to add Roth 401k deferrals, without losing reliance. We would have to restate the entire plan document, which we are trying to avoid since we recently restated all plans for Cycle 3. 

We thought a plan could possibly only allow Roth for Catch Up eligible but that doesn't seem to be the case, it looks like we may have to force plans that don't allow for Roth deferrals to now allow for it because of the new rules (well at least that's what our understanding is so far).

Again not so much a question but just wanted to know if we're the only ones dealing with this right now :).

 

[Bill Presson]

Yes, I believe all plans will have to be amended to allow for Roth. But I don't understand why you would lose reliance by amending?

[MoJo]

That is our understanding as well.  Absent the ability to make Roth deferrals, one cannot have Roth catch-ups - despite being mandated by Secure 2.0 for some people.  We've raised this issue in requests for guidance through various trades - as the only other option for plan sponsors that don't want Roth generally, is to eliminate catch-ups completely.

[Bri]

I am getting concerned that "we just won't have Roth" is sounding impermissible.   Plans aren't required to have Roth, plans aren't required to have catch-ups, but some of the legal discourse (articles in the daily newsletter, for instance) seems to sound as though the IRS is mandating sponsors shoehorn them in nevertheless.

[RaiCMC]

Hi Bill, thank you. I believe it's because we use IDP formatted VS plan documents, and the amendment would be considered a narrative amendment (at least that's what we were told). The Roth 401k language would appear in many sections of the document and I'm guessing an amendment wouldn't accomplish adding the provision. Also, we were told that the amendment may have to refer to the secure act. They told us to hold off for now, until they receive more guidance which is what we expected. I will post under this thread once we hear back in case anyone else uses the same documents as us. Thank you again for your reply.

 

 

[Below Ground]

The big concern we have is recharacterizing deferrals as catch-up to pass a failed ADP test.  This far, I have heard zero on this topic in every seminar on Secure 2.0.  To clarify, in the past if a plan failed ADP testing you could reduce or eliminate the payout of excess contributions by recharacterizing as catch-up.  Does this mean that the recharacterized deferrals must be classified as Roth?  If yes, what tax year would be impacted.  Say you failed testing for 2023.  Does this mean that the deferral is recharacterized as Roth which requires payment of income taxes for 2023 (year of deferral) or 2024 (year of "recharacterization")?  I note that the latter reflects the imposition of taxation in year of receipt for returned deferrals.  I had one person comment that requiring catch-up to be Roth does not apply to recharacterization under a failed test.  Not sure what the logic for that is.  Beyond the "guidance needs to be issued comment", does anyone have any idea of what is expected to happen with this concern?  Thanks in advance for your feedback!

 

[MoJo]

13 minutes ago, Below Ground said:

The big concern we have is recharacterizing deferrals as catch-up to pass a failed ADP test.  This far, I have heard zero on this topic in every seminar on Secure 2.0.  To clarify, in the past if a plan failed ADP testing you could reduce or eliminate the payout of excess contributions by recharacterizing as catch-up.  Does this mean that the recharacterized deferrals must be classified as Roth?  If yes, what tax year would be impacted.  Say you failed testing for 2023.  Does this mean that the deferral is recharacterized as Roth which requires payment of income taxes for 2023 (year of deferral) or 2024 (year of "recharacterization")?  I note that the latter reflects the imposition of taxation in year of receipt for returned deferrals.  I had one person comment that requiring catch-up to be Roth does not apply to recharacterization under a failed test.  Not sure what the logic for that is.  Beyond the "guidance needs to be issued comment", does anyone have any idea of what is expected to happen with this concern?  Thanks in advance for your feedback!

 

We are a recordkeeper and we've been discussing that for a while and have heard it mentioned - but no solutions other than we can no longer do that.  Roth rules require the "contribution" to be designated at time of deferral - so, if the contributions that cause a test to be failed, theoretically, they can't be recharacterized as Roth to correct the failed test - leaving the only option of refunds.  We've talked with our trades (ACLI, SPARK, ARA, etc.) and their comment letters to the IRS have raised this issue....

Many many problems with Roth catch-ups....  Even more so with Roth employer contributions....

[Bill Presson]

46 minutes ago, Below Ground said:

The big concern we have is recharacterizing deferrals as catch-up to pass a failed ADP test.  This far, I have heard zero on this topic in every seminar on Secure 2.0.  To clarify, in the past if a plan failed ADP testing you could reduce or eliminate the payout of excess contributions by recharacterizing as catch-up.  Does this mean that the recharacterized deferrals must be classified as Roth?  If yes, what tax year would be impacted.  Say you failed testing for 2023.  Does this mean that the deferral is recharacterized as Roth which requires payment of income taxes for 2023 (year of deferral) or 2024 (year of "recharacterization")?  I note that the latter reflects the imposition of taxation in year of receipt for returned deferrals.  I had one person comment that requiring catch-up to be Roth does not apply to recharacterization under a failed test.  Not sure what the logic for that is.  Beyond the "guidance needs to be issued comment", does anyone have any idea of what is expected to happen with this concern?  Thanks in advance for your feedback!

 

I raised this issue the first time I heard that it was a possibility and I thought it was really stupid then. But it's a provision that "raises funds" so it had to be included to make the whole thing happen. I would expect guidance late this year and anticipate that it will be treated like an in-plan roth conversion. My hope is that we can "convert" just the recharacterized amount and leave any related earnings alone.

[Paul I]

I agree with Bill that we likely will see guidance that uses in-plan Roth conversion rules to re-characterize amounts as Roth catch-up.  I think this logic also will be used as guidance for administering an employee election to have non-elective contributions or match treated as Roth.  There is a convenience to having one set of rules apply in at least 3 different situations (in-plan Roth conversions, test recharacterizations, NEC/match elections).  If so, then tax event would occur in the year the conversion occurred.  It will be interesting to see where the IRS comes out on these topics.

[Below Ground]

Well, I hope they hurry up with the guidance since this is a huge reprogramming job.  Of course any hope that this will be provided promptly is pure foolish thinking on my part.