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Roth Catch Ups - Secure 2.0 - Survey


Pension Nerd

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What do you think?

Can a plan allow Roth contributions to only be made for catch up contributions?

Participants who are under age 50 would have no option to make a Roth contribution - Roth would only be available to those who are making catch up contributions.

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5 minutes ago, Pension Nerd said:

What do you think?

Can a plan allow Roth contributions to only be made for catch up contributions?

Participants who are under age 50 would have no option to make a Roth contribution - Roth would only be available to those who are making catch up contributions.

Nope.  Roth is either allowed or it isn't, you cant limit it to catch up.

 

 

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Currently, Reg 1.401(k)-1(f)(1) says:

(f) Special rules for designated Roth contributions

(1) In general. 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 -

(i) 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;

This is the problem with the drafting error in SECURE 2.0 requiring high-paid individuals to make all catch-up contributions as Roth contributions. Existing rules say the you need to be able to make pre-tax deferrals in order to be able to make Roth contributions.  Hopefully this will be fixed before 2024 arrives (and may divine providence help the software programmers for payroll and recordkeeping systems).

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I want to make sure my original question doesn't get lost...

Can a plan allow Roth contributions to only be made for catch up contributions?

If Roth is added to allow for employees who earn more than $145,000 to make catch up contributions, can participants who are under age 50 (not catch up eligible) be only allowed to contribute to pre-tax (be excluded from the Roth)?

Is there a benefits, rights and features issue?

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42 minutes ago, Pension Nerd said:

I want to make sure my original question doesn't get lost...

Can a plan allow Roth contributions to only be made for catch up contributions?

If Roth is added to allow for employees who earn more than $145,000 to make catch up contributions, can participants who are under age 50 (not catch up eligible) be only allowed to contribute to pre-tax (be excluded from the Roth)?

Is there a benefits, rights and features issue?

I think the answer is no.  The cite RBG provided indicate a choice is required.  If you mandate *all* catch-ups be Roth, you have now eliminated that choice between pre-tax and Roth (despite the mandate for some) and in our opinion, is an ineligible Roth provision. (absent some creative guidance from the IRS which I'm not holding my breath on receiving before htis needs implemented (like, yesterday to program and proceduralize to be effective at the beginning of next year)

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1 hour ago, Pension Nerd said:

Is there a benefits, rights and features issue?

Very likely. As ROTH will only be available to HCEs unless you have a lot of folks who are non owners who make more than $145K but less than $150K.

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Agreed we've raised the same question and we've been told that it would be considered a BRF issue to only allow roth for catch up eligible participants. Since in most cases, the only people who would be eligible for Roth would be HCEs. 

 

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I may be overly optimistic, but with the projected 16 BILLION "government math" revenue estimate for this particular catch-up provision, I find it nearly unimaginable (nearly, I say - Congress works, or doesn't, in mysterious ways their wonders to perform, or not) that these issues won't be addressed in some fashion. In the meantime, I've vowed not to get overly exercised on such an issue over which we have no control at all. Hopefully I can maintain my stalwart resolve. Maybe I'm just suffering from PTSSB (Post Traumatic SECURE Syndrome Burnout). 

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The issue is the pending requirement to allow only Roth catch-up for High Paid (earning over $145K in the prior year).  All other participants can choose between pre-tax or Roth catch-up contributions.  Focusing on this narrowed topic, we have had at least 2 clients ask if they can require all participants to make catch-up contributions as Roth and not allow anyone to make pre-tax catch-up contributions.  One client commented that they run all of their payroll in-house and do not believe they can program the new requirement correctly.  The other client commented that they believe their payroll service provider cannot program the new requirement to work correctly.

Pension Nerd, the cite is Reg 1.401(k)-1(f)(1).  It is not explicit, but the way it is worded you have to be able to make a pre-tax deferral which you then can designate as a Roth contribution.  This implies that if you cannot make a pre-tax deferral, then you cannot designate it as a Roth contribution.

A further wrinkle in this whole mess is the ability to make Roth contributions is subject to 401(a)(4) and must be available to a nondiscriminatory group of participants (1.401(k)-1(a)(4)(ii) & (iv)).  Under the pending requirement, if you want High Paid individuals to be able to make catch-up contributions, you have to make Roth available to everyone for all elective deferrals (with the possible exception in a very tortured example of an NHCE High Paid group which I would not want to explore).

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  • 3 months later...
On 4/13/2023 at 3:47 PM, Paul I said:

The issue is the pending requirement to allow only Roth catch-up for High Paid (earning over $145K in the prior year).  All other participants can choose between pre-tax or Roth catch-up contributions.  Focusing on this narrowed topic, we have had at least 2 clients ask if they can require all participants to make catch-up contributions as Roth and not allow anyone to make pre-tax catch-up contributions.  One client commented that they run all of their payroll in-house and do not believe they can program the new requirement correctly.  The other client commented that they believe their payroll service provider cannot program the new requirement to work correctly.

Pension Nerd, the cite is Reg 1.401(k)-1(f)(1).  It is not explicit, but the way it is worded you have to be able to make a pre-tax deferral which you then can designate as a Roth contribution.  This implies that if you cannot make a pre-tax deferral, then you cannot designate it as a Roth contribution.

A further wrinkle in this whole mess is the ability to make Roth contributions is subject to 401(a)(4) and must be available to a nondiscriminatory group of participants (1.401(k)-1(a)(4)(ii) & (iv)).  Under the pending requirement, if you want High Paid individuals to be able to make catch-up contributions, you have to make Roth available to everyone for all elective deferrals (with the possible exception in a very tortured example of an NHCE High Paid group which I would not want to explore).

Paul - How have you advised your clients who have asked if they can require all participants to make catch-up contributions on a Roth basis? I have clients asking the same question and it's not clear to me whether this would be permissible.

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As so of today, we remain without guidance and not even a hint if or what the IRS is thinking about these issues.

On one extreme, imagine an increasingly likely government shutdown come October 1st that lasts several weeks.  If the technical correction to restore the deleted provision allowing catch-up contributions is not passed before year-end and the IRS is unable to find a workaround, conceivably no one could make a catch-up contribution starting in 2024.  That almost certainly would be fixed sometime in 2024, but it will be messy.

On the other extreme, the IRS feels it has the authority to issue a workaround, likely will require a plan to allow both pre-tax and Roth deferrals and pre-tax and Roth catch-up contributions with the restriction of Roth only catch-ups for High Paids.

What we do know now from a recent PSCA survey is about two-thirds of plans say they are unprepared to administer this provision and don't think they will be able to implement anything in time to be ready on January 1, 2024.

To answer your question directly, I tell my clients it is unlikely that they will be able to require all participants to make catch-up contributions on a Roth basis.  I also tell them we are in for some chaos, and they are in the same situation as a large number of other plans.

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Managing uncertainty is a part (often, a most important part) of the job for a lawyer or other adviser.

How about this?

Let all participants make non-Roth and Roth deferrals as each chooses, and recognize:

a need to plan for what to do assuming an absence of agency guidance.

a need to plan for what to do assuming software will be ineffective or unavailable.

an employer/administrator should put in some effort—reasonable considering the plan’s risk (see the next three points), the employer’s resources, and the plan’s resources while not incurring more than prudent plan-administration expense—to apply the tax-qualification condition of restricting a $145,000 participant’s catchup deferrals to Roth.

the Internal Revenue Service has limited resources to detect errors in applying this tax-qualification condition.

that, even in an examination, the IRS might have institutional reasons not to enforce too harshly, perhaps especially if an error happened before the Treasury or IRS had published guidance.

that, if an employer/administrator, an independent qualified public accountant, or even the IRS detects an error, there are opportunities to correct the error without tax-disqualifying the plan.

that the Labor department’s Employee Benefits Security Administration seems unlikely to pursue enforcement for harms (if any could be proved) to an individual participant, or even an affected class of the plan’s participants, that resulted because the plan’s administrator followed the participant’s direction (even if the direction was arguably contrary to the plan’s governing documents).

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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