Interested Party

WCC . . . . Thanks for the response and providing an alternative perspective.

A client asked about the following situation: * Employee becomes a highly paid participant ("HPP") for 2027 subject to the mandatory Roth catch-up rules. * Although the plan has adopted a "deemed Roth election" feature, employer never provided notice to the employee that she was an HPP for 2027 and, thus, was required to make catch-up contributions on a Roth basis. * HPP makes pre-tax deferrals in 2027 up to the 402(g) limit and the statutory catch-up limit. The client asks "what is the required correction?" My thoughts are as follows: * The client cannot move the pre-tax catch-up contributions to the HPP's Roth deferral account, because the deemed Roth election feature does not apply (due to the fact that the HPP was not given an opportunity to opt out of the deemed Roth election feature). * In this case, the pre-tax catch-up deferrals (and earnings) are distributed to the HPP under the mandatory Roth catch-up regulations. * However, I don't think this is the full correction. I believe there has been a failure to provide the HPP with an opportunity to elect and make catch-up contributions. Accordingly, this error must be corrected by the employer making a QNEC as set forth in Rev. Proc. 2021-30, Appendix A, Section .05(2)(g)(4)(a) ("Improperly excluded employees: catch-up contributions only"). Have I thought this through correctly? Thanks in advance.

No plan document issues. It will be a matter of the sponsor's practices. Again, I appreciate the replay. Thanks.

justanotheradmin: Thanks for the response. With respect to your item 5 comment, do I understand you to believe the participant can make a new deferral election (i.e., essentially opting back into the deemed Roth feature) as late as 12/31/26 to be able to reclassify as Roth catch-up due to a failed 2026 ADP test (which we learn about in early 2027)?

I would appreciate any input on helping me think through the deemed Roth catch-up contribution feature with respect to the new mandatory Roth catch-up contribution rules for high earners. Here is the scenario: 1. Plan will adopt a deemed Roth catch-up contribution feature. 2. HPI will be presented with election form no later than 12/1/25, and will be given the opportunity to elect out of the deemed Roth feature. 3. HPI elects out of deemed Roth feature before first pay date in 2026. 4. Plan allows deferral election changes at any time. Employer does not want to limit deferral election changes to only one time per year. 5. Mid-year 2026, HPI wants to revoke her election opting out of the deemed Roth feature. In other words, HPI now wants her catch-up contributions be deemed to be Roth catch-up contributions. Can HPI revoke her opt out election mid-year, thus electing to be subject to the deemed Roth catch-up contribution feature? If she can revoke her opt out election mid-year, are there different mid-year revocation deadlines depending on whether the catch-up contribution will be triggered as a result of exceeding the 402(g) limit (which will be known mid-year) vis a vis exceeding the ADP limit (which won’t be known until early 2027)? If there are no hard rules under the CODA regulations for this type of mid-year revocation, can sponsor take the approach (as a reasonable interpretation of the regulations) that the mid-year revocation is permissible as long as it is not known at the time of revocation whether a specific deferral limit has been exceeded? I appreciate any thoughts. Thanks.

Peter . . . . Again, thanks for your input. I always find your responses on these boards informative.

Paul I and Peter -- I appreciate the general fiduciary issues you raised that must be considered, as well as the "nuts and bolts" on how the promotion will be administered. And to clarify, I am a representative of the provider rather than the plan. Thanks again.

Bundled 401(k) service provider wants to attract rollover contribution dollars. Accordingly, the provider wants to offer a promotional program where a participant will not be charged an asset-based fee for 6 months on any rollover contributions made to their 401(k) plan. At the end of the 6-month period, the participant will be charged an asset-based fee on the rollover contribution account that is equal to the asset-based fee for all other accounts in the plan for all other participants. In addition to providing administrative services, depending on the plan, the bundled provider offers: (a) directed trustee services; (b) 3(21) or 3(38) services; (c) online participant managed account services; and (d) discretionary trustee services for pooled accounts. Other potentially relevant facts: Proper and timely service provider and participant fee disclosures will be made. This offer will apply to all participants in a given plan regardless of the participant’s existing account balance and regardless of the amount of the rollover contribution. Marketing materials will not be deemed to be providing investment advice (or any other fiduciary services beyond what is already offered in the plan). Participant education services -- but not investment advice -- will be provided to participants in connection with this 6-month promotional offer. Any issues? Benefits, rights and features issues? Prohibited transaction issues? Any action the trustee should take to minimize any DOL/IRS risk? Any thoughts would be greatly appreciated. Thanks.

Austin -- Thanks. You and Bri have convinced me to work with the participant to have the amount distributed to a Roth IRA.

And if the client insists on self-correcting and not going through VCP? Forced cash distribution to participant pursuant to EPCRS? Give participant election to rollover to a Roth IRA if he wants?

C.B. The problem is that a Roth IRA was rolled over to a Roth 401(k) . . . Which I understand to be prohibited by law and that the error must be distributed to the participant pursuant to 1.401(a)(31)-1, Q&A-14. I don't see there is any discretion to simply recharacterize as a Roth Rollover Contribution and keep it in the plan. Thanks.

All -- Thanks for your responses. To answer questions: Lou S/Bri -- The plan administrator is expected to take the position that this is an eligible inadvertent failure under SECURE 2.0 that can be corrected pursuant to IRS Notice 2023-43, Q&A-8. Lou S -- In researching the matter, the 2018 rollover check indicated it was a rollover from IRA. The check did not indicate it was from a Roth IRA. Written plan notes suggest the plan administrator verbally confirmed the rollover came from a traditional IRA. The participant -- this week -- has presented the plan with documentation that clearly shows the rollover was from a Roth IRA. Peter -- The error was identified this week when the participant called to inquire why he didn't have a Roth Rollover Contribution balance (Answer: Because the plan administrator was under the mistaken belief that the rollover came from a traditional IRA). I believe -- unless there is guidance to the contrary -- that this error can be self-corrected. I'm just not sure whether the distribution must be made in cash to the participant (i.e., not eligible for rollover; not a qualified distribution?), or whether the plan can treat this as an ordinary distribution and allow the participant to make an affirmative election (i.e., receive a cash distribution or roll back into a Roth IRA). I was leaning toward a cash distribution pursuant to EPCRS, but Bri has me wondering if the plan can treat this like an ordinary distribution and allow the participant to elect cash or a rollover to the Roth IRA). . . . And I have not found guidance in helping with this issue. Thanks all for any additional thoughts.

Bri . . . Thanks for the response. Just so I understand you correctly, you believe the plan can/should treat this like an ordinary distribution (i.e., permit participant to rollover to a Roth IRA, or receive a cash distribution that constitutes a qualified distribution)? Thanks again.

In 2018, participant rolled over $50,000 from an IRA to his 401(k) account. At the time, the recipient 401(k) plan administrator believed the rollover was from a Traditional IRA. This week, the 401(k) plan administrator learned the 2018 rollover was from a Roth IRA. The error was discovered when the participant called and asked why he didn't have a "Roth Rollover Contribution" account balance. Answer: Because the plan believed the 2018 rollover was from a Traditional IRA. The rollover account is now worth $55,000 ($50,000 rollover contribution plus $5,000 earnings) Treas. Reg. Section 1.401(a)(31)-1, Q&A-14 requires that "the amount of the invalid rollover contribution plus any earnings attributable thereto [be] distributed to the [participant]. . . . " Two Questions: (1) I feel there should be guidance on how to report the distribution that will be made to the participant and I'm just not finding it. Can anyone point to any such guidance? (2) In the absence of such guidance to the contrary, does anyone see any issues with the following: (a) Distribute $55,000 to the participant. (b) The plan has no idea what portion of the $50,000 rolled over amount constituted basis in the Roth IRA (and the plan administrator is not inclined to try to find out what happened 7 years ago, and wants to give the participant the benefit of the doubt from a taxation perspective). (c) Even though the Roth dollars have been in the 401(k) plan for more than five years, and the participant is older than 59-1/2, this is not a qualified distribution because the Roth dollars should never have been in the plan in the first place. Accordingly, the plan will report the $55,000 distribution as consisting of $50,000 non-taxable basis and $5,000 as taxable earnings. (d) This is not an eligible rollover distribution. Therefore, 10% federal income will be withheld from the $5,000 taxable earnings portion of the distribution unless the participant elects a greater or smaller amount of federal income tax withholding. (e) The 1099-R will be coded as an EPCRS distribution (Code "E") as a distribution of an excess amount. **** Any leads or thoughts would be appreciated. Thanks.

Bill: Thanks for the response. Last night, after I asked the question, I realized there needs to be a new EIN/employer. . . . And that's the piece I was missing in thinking this through. Thanks again for the helpful response.