Leaderboard

In my mind, option 1 is very problematic for one very simple reason. Despite a participant making two elections (one for regular and one for catch-up) from the get-go, the amounts withheld pursuant to the catch-up election ARE NOT CATCH-UP CONTRIBUTIONS UNTIL A PLAN/REGULATORY LIMIT IS REACHED. Consider an employee who terminates mid-year, after the employer made a "tax-election" on behalf of the participant, without considering their entire tax situation, and then it turns out that the catch-up contributions are NOT catch-ups, because a limit wasn't reached. The employer just potentially cost the participant tax consequences unnecessarily, and "malpracticed" it at the same time. I'm a lawyer (but not a litigator) but if a large enough employer did that, then maybe had mass layoffs costing many people money, I'd brush up on my class-action litigation skills (or referral skills) rather quickly. As a recordkeeper, we hate all available options, but the single election with spillover seems less problematic. That said, my recordkeeping employer uses the dual election method (and when this becomes effective, it will impact me personally.) Frankly, I'm not going to be working long enough for the numbers of beginning Roth contributions to work, so my after-tax savings won't be in the plan.... I expect this will impact a number of those who are going to be subject to this rule....

FWIW, and I understand this isn’t helpful, I despise everything about this rule; especially the application of the unique compensation amount.

Thanks, @Effen -- that was a fun thing to wake up to on a Saturday. 😲 We did manage to stop them mid-stream, and have added a few more safeguards. Staying one step ahead is a challenge sometimes!

Consider thinking about it this way: If the employer were seeking the Internal Revenue Service’s letter ruling that the change in the employer’s obligation to pay deferred compensation is not an acceleration but rather is no more than a reformation of the written plan to state what was both parties’ actual intent when they made their contract, what “clear and convincing evidence” would you show to prove what had been the parties’ true intent? Would that evidence persuade an IRS reviewer? If the evidence wouldn’t persuade an IRS reviewer, or doesn’t persuade you, that tells you some useful information about how to shape your advice. This is not advice to anyone.

Yes, after the sale I would say there is an ASG. I suggest unfreezing the DBP before the transaction (a MUST) and using the transition rule under 410(b)(6)(C), which applies to ASGs and also gives 401(a)(26) relief for the same period. 410(b)(6)(C) (C)Special rules for certain dispositions or acquisitions (i)In generalIf a person becomes, or ceases to be, a member of a group described in subsection (b), (c), (m), or (o) of section 414, then the requirements of this subsection shall be treated as having been met during the transition period with respect to any plan covering employees of such person or any other member of such group if— (I) such requirements were met immediately before each such change, and (II) the coverage under such plan is not significantly changed during the transition period (other than by reason of the change in members of a group) or such plan meets such other requirements as the Secretary may prescribe by regulation. 1.401(a)(26)-5 (5) Certain acquisitions or dispositions — (i) General rule. Rules similar to the rules prescribed under section 410(b)(6)(C) apply under section 401(a)(26). Pursuant to these rules, the requirements of section 401(a)(26) are treated as satisfied for certain plans of an employer involved in an acquisition or disposition (transaction) for the transition period. The transition period begins on the date of the transaction and ends on the last day of the first plan year beginning after the date of the transaction. (ii) Special rule for transactions that occur in the plan year prior to the first plan year to which section 401(a)(26) applies. Where there has been a transaction described in section 410(b)(6)(C) in the plan year prior to the first plan year in which section 401(a)(26) applies to a plan, the plan satisfies section 401(a)(26) for the transition period if the plan benefited 50 employees or 40 percent of the employees of the employer immediately prior to the transaction. (iii) Definition of “acquisition” and “disposition.” For purposes of this paragraph (b)(5), the terms “acquisition” and “disposition” refer to an asset or stock acquisition, merger, or other similar transaction involving a change in employer of the employees of a trade or business.

The EBSA loves the DOL Online Calculator. I would bet they would say that is an approved approach for calculating earnings for a reinstated forfeiture. One of the big issues with handling missing participants is none of the agencies want to let the plan fiduciaries off the hook for trying to find a missing participant, no matter how hard the fiduciaries try to find the participant. Several times when the EBSA has been asked when the plan can stop searching, the answer effectively has been "Never". With that in mind, the only way the fiduciaries get off the hook is when the plan terminates, they do one last search, and then deliver transfer the funds and any available demographic information to the PBGC under their program for terminating defined contribution plans. It is interesting to note that the PBGC will not credit any earnings in the event they locate the participant. If you are a fiduciary and have a handful of missing participants, until you terminate the plan, life is not fair.

I share the opinion that allowing separate elections in payroll for elective deferrals and for catch-up contributions is a bad idea, but there are companies that use this approach and collect separate elections. It is a reality, and as I noted, it can cause problems with compliance (which - thankfully - is not done by payroll). It is worth exploring why a company would use the approach to make separate elections. The scenario I have seen most often involves the plan having a relatively low maximum elective deferral percentage (more commonly applicable only to HCEs). Catch-up contributions have universal availability and the company takes the position that a participant who defers at the maximum percentage must have the opportunity to make catch-up contributions, and so they allow a separate catch-up election. The other scenario is where the payroll cannot or will not support tracking the annual deferral limit and automatically change from elective deferrals to catch-up contributions once the annual deferral is reached. This seems to be more prevalent when payroll is run in-house, but there are payroll companies that say this is not their responsibility. Not my recommendation, not my circus, not my clowns, but it happens.

MoJo, I too dislike door number one for reasons aligned with your reasons.

RatherBeGolfing, thank you for the information about the rulemaking. WCC and Paul I, thank you for sharing your helpful, smart thinking. WCC, would any element of your reasoning change if the employer takes wage reductions for elective deferrals never as a percentage of any measure of compensation but always as a specified amount? (Some employers will continue to do that no matter what anyone resolves about restraining some participants’ choices for catch-up deferrals.) Taking deferrals as specified amounts would seem to make knowable a year’s apportionment between non-Roth and Roth deferrals. For example, if the relevant year’s limit for a 60-something, hypothetically, is $34,750, of which $23,500 may be non-Roth and $11,250 must not be non-Roth and there are 26 pay periods in the year, the employer could set a pay period’s non-Roth amount as $903.84 and the Roth amount as $432.69. The trouble about a participant’s employment ending (or deferrals otherwise ending) before the year ends seems relatively constant with either a percentage of compensation or a specified amount as the mode for wage reductions. I apologize for not specifying that my imaginary plan has no matching contribution. For an employer that calls a participant to specify, distinctly, each pay period’s non-Roth and Roth amounts, could door number two work? Once a participant’s amounts deferred under her non-Roth election have filled the year’s without-catch-up limit, the amount that otherwise would be the participant’s per-pay non-Roth amount is added to her per-pay Roth amount (unless the participant elects, properly, otherwise)? Bill Presson, § 414(v)(7) has many harmful aspects, and one might vent a little. Paul I, I recognize that, at least initially, a recordkeeper records an amount as non-Roth or Roth following the paymaster’s instructions, which convey (one hopes) the participant’s instructions. Imagine the plan’s governing document provides that, once a § 414(v)(7)-affected participant’s non-Roth deferrals within a year have filled her without-catch-up limit, the participant’s non-Roth election is superseded and replaced with a deemed election for Roth deferrals. Could an employer/administrator and its recordkeeper agree, between them, that the recordkeeper’s service obligation is to track when non-Roth deferrals must stop? And, if the plan so provides, become Roth deferrals? With these points, could a service contract provide that the recordkeeper tells the paymaster what non-Roth and Roth deferral amounts to report on a § 414(v)(7) affected participant’s Form W-2 wage report? Or, even without a distinct information feed from the recordkeeper to the paymaster, might it be good-faith reporting for a paymaster to presume the recordkeeper performed according to its service contract? BenefitsLink neighbors, are there other challenges I ought to think about?

From the perspective of the recordkeeper, the recordkeeper needs to track what is sent to them by payroll. If payroll says pre-tax or Roth, and elective deferral or catch-up, that's what it is. (For compliance test, there may be some amounts that get treated other than as designated by payroll, but that is not the question.) If payroll is run where an employee only can specify one elective deferral % for pre-tax and one elective deferral for Roth, then payroll will have to track YTD deferrals and stop the pre-tax when the accumulated total elective deferrals reach the deferral limit. If payroll is run where a High Paid employee can specify a pre-tax elective deferral, and also a Roth elective deferral and a Roth catch up, then payroll again will have to track all the separate accumulated totals and stop the pre-tax contributions once the total elective deferrals reach the deferral limit. There are other permutations of elections and they each have their downsides. Administering the new provisions will be significantly more prone to errors. The takeaway is, if there is firing squad to shoot whoever screws it up, payroll will not stand next to the recordkeeper, rather payroll will stand in front of the recordkeeper.

Regarding door number 1, are you suggesting/asking the following?: a highly paid employee is expected to receive $300,000 in eligible pay in 2026 and has a 20% percent pre-tax deferral election on file. The employer will change the deferral election to be 2.5% Roth ($7,500/$300,000) and 17.5% pre-tax as of January 1, 2026? If my above interpretation is accurate, then I would choose door number 2 because door number 1 is a bad idea (in my view). Problems I see with option 1 are: correctly determining expected pay, termination before year end, ensuring the Roth portion is still matched even if the plan does not match catch-up, and not correctly processing a deferral election of 20% and deeming it before any dollars are required to become Roth. Door number 2 is preferred. I have spoken with many large employers (+1000 ee's) and for those who currently have a single deferral election process (i.e., spillover), they are going with the second option. For employers that currently use a separate/dual election process, it is a different story (but still not option 1).

A big thank you to Lois and the entire IT team (is that just Lois?) for cleaning up the site after the major spam attack over the weekend. Every board was littered with messages. These boards are very useful to many people and it doesn't happen without great support. Thank you to the entire clean up crew.

I am with everyone else. They have covered the law so I have only one more question: Why are you putting yourself in the middle of two divorcing people? I try as hard as I can to stay out of that position with all my clients. Divorces can be high emotion situations were people get nasty. Leave me out of it as much as possible is my position 100% of the time.

Check the plan document usually but not always there is language that addresses short plan years and what happens with accruals, if you have an adoption agreement/master text its probably in the master text somewhere. If if is individually designed I'm not sure where it would be. If you are deviating from existing plan terms, address it in the amendment but I don't see why it couldn't be addressed in either a single amendment or a series of amendments. If you are not giving at least a pro-rated accrual credit for the short plan year I'd assume you would want a 204(h) notice addressing the short year and I'd assume you'd have to pass 401(a)(26) on an accrued to date basis.

Just an opinion: changing anything on Exhibit A is a plan amendment. Thus, something must be signed (board resolution, plan amendment, probably both).