Pre-Tax or Roth Deferrals but not both

[pensionam]

Has anyone ever had a plan sponsor do this?  Our standard document doesn't have this option but has a write in section where we could add language.  I've never seen it before but I don't see it being an issue compliance wise.  The plan sponsor can't figure out how to get their payroll system to do both so this was their solution.

[chc93]

Haven't seen this one-or-the-other.  Change payroll systems...

[Mike Preston]

IIRC the IRS is on record saying that Roth can only exist in a k plan that provides for both.

[shERPA]

I recall the same as Mike. 

[Mike Preston]

After taking a separate glance at the OP, it could be that there is a nuance here that bears delving into.  Assume a plan provides for both but it has some additional language that requires a plan participant to elect either 100% pre-tax and 0% Roth or 0% pre-tax and 100% Roth with respect to any given contribution.  As the OP states, because their payroll company can't support anything else.

I agree with the OP that it doesn't appear to be a problem, compliance wise.

I've never seen it directly addressed by the IRS, though.

[pensionam]

14 hours ago, Mike Preston said:

After taking a separate glance at the OP, it could be that there is a nuance here that bears delving into.  Assume a plan provides for both but it has some additional language that requires a plan participant to elect either 100% pre-tax and 0% Roth or 0% pre-tax and 100% Roth with respect to any given contribution.  As the OP states, because their payroll company can't support anything else.

I agree with the OP that it doesn't appear to be a problem, compliance wise.

I've never seen it directly addressed by the IRS, though.

They're telling me that they can't get their payroll system to allow for both but my feeling is that it's a user problem and not a payroll problem.  They're going to offer both Pre-Tax and Roth but they want the participant to choose only 1 and not do both at the same time due to their payroll limitations.

[RatherBeGolfing]

If its a write in ("other") section of the document, I would probably insist on a determination letter.  I would not do via an administrative procedure if the document clearly allows for both without restrictions.  

[Bill Presson]

I love how payroll incompetence or software limitations become retirement plan problems.

I would recommend getting a new person to run the payroll or getting a new payroll company.

[pensionam]

35 minutes ago, Bill Presson said:

I love how payroll incompetence or software limitations become retirement plan problems.

I would recommend getting a new person to run the payroll or getting a new payroll company.

Unfortunately, our main contact, the HR person is also the payroll person.  I really want to tell her that it isn't possible and she needs to figure it out or get a new payroll system but that's difficult to convey nicely.

[pensionam]

1 hour ago, RatherBeGolfing said:

If its a write in ("other") section of the document, I would probably insist on a determination letter.  I would not do via an administrative procedure if the document clearly allows for both without restrictions.  

We're on an ASC doc so it is an other section where you can describe any "special rules".  We'd have to write in under both the Deferral and Roth section that if they defer from one, they can't defer from the other at the same time.  I was hoping for a clear answer on this but it sounds like it's kind of a grey area.  I may just go the route of telling the client somehow nicely that they need to figure out their payroll system.

[Bri]

I'm just here waiting for Larry's tone when he just tells you to get a payroll provider who will accommodate both!  ?

[Luke Bailey]

I don't recall any formal or informal guidance from IRS directly saying you have to permit pre-tax if you also do Roth, but at least arguably what is proposed here would be inconsistent with the phrase "in lieu of all or a portion" in 402A(b)(1). Also, the IRS's Q&A's on its website have the following Q&A:

Can I make both pre-tax elective and designated Roth contributions in the same year?

Yes, you can contribute to both a designated Roth account and a traditional, pre-tax account in the same year in any proportion you choose.

Unless the LRMs allow this as an option (and I doubt they do), I would be very leery of doing it. Since you're on an ASC doc, why don't you contact them and ask whether this is a "special rule" that they think you can add.

[Doc Ument]

 

 

A plan cannot be written to allow for only Roth deferrals.

 

1.401(k)-1:

 

"The term designated Roth contribution means an elective contribution under a qualified cash or deferred arrangement that, to the extent permitted under the plan, is designated irrevocably by the employee at the time of the cash or deferred election as a designated Roth contribution that is being made in lieu of all or a portion of the pre-tax elective contributions the employee is otherwise eligible to make under the plan;..."

 

IRS website FAQ:

 

"Can a plan offer only designated Roth contributions?

 

No, in order to provide for designated Roth contributions, a plan must also offer traditional, pre-tax elective contributions."

 

https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts#13

 

I would be surprised if any resource like EOB fails to mention this requirement.

 

 

[coleboy]

I work for a payroll company that uses 3 ( and soon to be 4) different payroll systems. They all allow for both pre-tax &  ROTH.

[pensionam]

Thanks for your input everyone.  I spoke further with the plan sponsor and they are going to work with their payroll provider to figure out what's wrong with the parameters that they have set up since it's not allowing participants to do both pre-tax and roth.

[thepensionmaven]

We use Datair for our documents; allows for both pre-tax and Roth, with any mix as long as the combination does not exceed 402(g).

The question we run into about this is, how do you treat Roth when it comes to the SHNE contribution?