QACA plans and Roth

[Kimberly S]

With the new QACA plans that will be available next year, is it possible to have the automatic deferral enrollments go in as Roth deferrals? (I'm not asking if it's a good idea, just if it's possible.)

[Guest fender5150]

You mean; automatically enroll people in the Roth feature, instead of the deferred feature? I like the Roth for younger investors, so this could be good for them.

Roth is not subject to matching, so this probably won't work for QACA. However: I understand the IRS isn't answering questions that are not specifically addressed in the temp regs. They are supposed to come out with final regs before the end of the year.

Anyone want to take bets regarding whether this will happen?

From what I've seen of QACA, I'm not a big fan. This could be quite expensive, assuming that automatic enrollment increases participation in the plan:

While the match is lower, the automatic enrollment will increase participation, so ultimately, this could result in the employer paying more; and paying benefit money out to people who don't really care: IE: They wouldn't have joined the plan if 'The Man' hadn't automatically enrolled them.

My advice to clients: Use automatic enrollment if you don't have a safe harbor plan, but don't adopt a QACA.

Any thoughts?

[Guest mjb]

Without even checking the applicable sections of 402A, isnt there a liability risk to the plan's sponsor in automatically forcing contributions into a roth for employees who will be in a lower tax bracket in retirement and therefore will pay extra taxes? Contributions made to a roth are irrevocable. Why cant the employees sue the plan sponsor/fiducaries for the amount of taxes paid because they did not consent to make AT contributions?

[401_4_ever]

(1) Roth Contributions are matched.

(2) MJB under that reasoning, why can't employees sue the sponsor for the amount of taxes they'd have to pay at retirement without their consent? I would imagine all these issues would be handled in the disclosure notice prior to being auto-enrolled.

Fender, the other thing I would add, is that in my experience, most employer's aren't against safe harbor contributions due to the amount of money they'd have to pay. They are against it because of the 100% vesting. (My experience at least). I've gotten a lot of excitement and favorable feedback about the ability to put a 2 year vesting schedule on the contribution, and will now take advantage of it.

[Kimberly S]

Roth is not subject to matching, so this probably won't work for QACA. However: I understand the IRS isn't answering questions that are not specifically addressed in the temp regs. They are supposed to come out with final regs before the end of the year. Anyone want to take bets regarding whether this will happen?

How is Roth not subject to matching? It is my understanding that if you match, it must apply to all elective deferrals -- regular or Roth.

Unfortunately, our programming people can't wait until the final regs to start putting this into place if it is going to be ready for our clients January 1, 2008.

[John Feldt ERPA CPC QPA]

To answer your original question: Yes it is possible, but I doubt many (if any) clients will do that.

If your plan has automatic enrollment, the plan language (or the amendment language) must state whether or not the automatic deferrals will be pre-tax regular deferrals or post-tax Roth deferrals (or possibly the langauge could state that it is split up between them). I think it is probably best to adopt plan document language that has automatic deferrals being done on a pre-tax basis. However, some odd-duck client out there might want auto-enroll deferrals done as after-tax Roth.

Deferrals are either done as Roth or pre-tax. If the plan matches your deferral, you get a match, pre-tax or Roth does not change that.

[Guest fender5150]

Thanks for the clarification on the Roth being eligable for a match. I just looked it up. I don't have plans with a Roth (obviously), but I don't know how I gota that twisted around!

Thanks!

Fender.