No employer match on Roth deferrals--how to test

[jkharvey]

We have an employer that wants to match on pretax deferrals only and not on Roth. I don't know how many participants would actually make Roth deferrals without a match, but if they did, how would this be tested? I know about document issues and the ADP/ACP test. My questions are coverage and BRF. Would this be considered a BRF to be tested separately as a separate rate of match? Since the participants have the ability to choose the Roth that isn't receiving a match, does that change the BRF issue?

Thank you

[Mike Preston]

Not to be a buzz kill, but I don't think the regs contemplate segregation of different types of deferrals. If the employer wants to discourage Roth the employer should remove the ability to make Roth.

[spiritrider]

Not that clients always have a rhyme or reason for what they want to do, but what is the client's rational for this desire? I understand that offering or not offering a Roth option is likely an administrative expense.

With all due respect to Mike Preston, it seems it is the employer who is the buzzkill here. What is the employer benefit to limiting the employer match on a per employee pre-tax vs. Roth basis? Is there an extra administrative fee for each Roth sub account?

[austin3515]

I know the type. They don't know why they feel so strongly about something, but they do, and though the rationale might not make sense to you (albeit, you are subject matter expert), their instincts have made them tons of money in their life time, so hey, better trust all of those instincts!

I think as long as your not safe harbor, you just need to pass the ACP test. It's not a BRF issue because everyone has the ability to make pre-tax contributions and is therefore eligible for the same match. They voluntarily elected to contribute Roth, and at their own peril it would seem.

[hr for me]

Back in the day, aftertax (post86, pre87) contributions were often not matched so that it encouraged employees to put at the least the basic matched % into the pretax deferrals first and probably helped the ADP testing. And that pretax deferrals might be more likely to stay in retirement funds longer due to the later tax penalties and consequences, since Roth and aftertax could be pulled out more easily (or at least with less tax consequences)

I have to wonder if that isn't the employers thought? They want to allow but not encourage?

[spiritrider]

That certainly makes sense for after-tax contributions, but while employed Roth (like all deferrals) cannot be accessed at all before 59.5 and then only if the plan allows in-service withdrawals.

[Mark Whitelaw]

You may also want to remind the client one of the reasons the Roth was created - addressing the planning needs of successful people more likely to be deferring into a higher tax rate with pre-tax savings plans. Key middle-management employees most at risk of this bracket creep risk. Pre-tax accounts are great for those that don't expect to attain retirement income objectives.

Otherwise, all things being equal, the client wants to promote its support of the needs of key employees with providing a comparable Roth match.

[Tom Poje]

The document we use has the option:

Matched Employee Contribution Inclusions

a. Elective Deferrals are included in the definition of Matched Employee Contribution to the extent select below

i. [ ] Include a Participant's Catch-up Contributions in the definition of Matched Employee Contribution

ii. [ ] Include a Participant's Roth Elective Deferrals in the definition of Matched Employee Contribution

so it is certainly possible to exclude Roth. why someone would do so is another matter as it penalizes those who choose Roth deferrals. and as Austin pointed out, no you can't do that if the plan is safe harbor.

[buckaroo]

Does the employer understand that the Roth is tested as part of the ADP? Perhaps they think it would be included in the ACP. If so, they may be worried about corrective distributions to the HCEs (e.g. match) from the ACP test if more people made Roth elective deferrals.

[jkharvey]

Tom,

When you have a Plan Sponsor select the option not to include Roth Elective Deferrals in Match Employee Contributions, are those particular participants not included then in coverage testing as "benefitting"?

[austin3515]

It wouldn't be a coverage issue because everyone is eligible to make pre-tax elective deferrals. Just an ACP testing issue. Your treated as eligible for the matching portion of the Plan as long as you have the ability to make matched elective deferrals and you met any allocation requirements. If the sole reason you did not get the match is because you didn't make any "matchable" contributions, that's not a coverage issue - that's an ACP test issue. This situation is no different than the employee who makes no deferrals at all. They could have, and that is what matters. They chose not to, and that does not matter (for coverage).

[BG5150]

I disagree with it on philosophical grounds. Most people make their decision on what type of deferrals to make based on their tax situation and perceived tax situation come retirement time. Why should my choice of taxation of my deferrals affect whether or not the company matches my contributions?

[Belgarath]

I'm not convinced there isn't a potential nondiscrimination issue. You have both current and effective availability requirements, and depending upon the auditor, I can see an effective availability issue if you can't get a match on your Roth deferral.

I wouldn't want to have to defend it...

[austin3515]

I disagree with it on philosophical grounds.

What difference does this make? Philosophy is inherently subjective and it doesn't sound this client is asking for opinions on philosophy.

You have both current and effective availability requirements, and depending upon the auditor,

Since anyone can do either with no restrictions whatsoever, I don't see where the issue would be. Not to mention every pre-approved document includes the option to match or not to match Roth.

[Belgarath]

Austin - you might want to be a little careful with such a blanket statement. The pre-approved VS document from at least one major provider does not provide such an option.

Now, the fact that many or most pre-approved docs permit it would indicate to me that the IRS doesn't seem to have a problem with it - however, I still wouldn't want to be forced to defend it.

It is only an academic issue for me, as I would simply tell a potential client we can't do it. Some of these "Roth problems" are just holdovers from investment platform issues where they couldn't properly handle some Roth issues (and perhaps still can't, for that matter...)

[austin3515]

I'm sure you would be more careful than me, but then you're posting under your real name and I post under a pseudonym

And presumably Tom's document drafters and mine (who I know I have the utmost respect for) thought it was ok. Not to mention the IRS agreed that it was ok with none of those caveat statements about "this provision could potentially be discriminatory!" So call me cavalier for making such a controversial statement, but I still stand by it even if perhaps I may have overstated by a millimeter or two.

[Belgarath]

I think you misunderstood. My real point (which I didn't make very clear) was that NOT all pre-approved documents allow the option. As to nondiscriminatory or not, that's a separate issue, and I can certainly see why you wouldn't worry about it when you have a pre-approved document that permits it.

I'm very likely overly paranoid, but as I said, it doesn't really matter to me in real life!

Just as a matter of curiosity only - have you ever actually had this request? I haven't, thankfully...

[austin3515]

HAve I ever had this ridiculous request in particular? No. Have I ever had ridiculous requests for which I could not fathom any rationale? Absolutely. There is no telling what client's passions will convince them of.