Off Calendar Plans and Roth Catchup 2.0 Requirement

[justatester]

Secure 2.0 Roth Catchup contributions.  The information indicates that it applies to taxable years beginning after December 31, 2023.  Since catchup is a participant contribution and they used the word Taxable years, does it impact the catchup do to plan limit, 415 or ADP Catchup in early 2024?  

Example:  Plan year is 2/1/23-1/31/24.  Plan fails the ADP test.  It is my understanding that any catchup due to and ADP failure become catchup as of the last day of the plan year.    With secure 2.0 does that mean, anyone over the $145k threshold, their ADP catch up must be Roth?  If so what do you do if they did not make enough contributions in 2024 to cover the ADP catch up amount.  

[Paul I]

We do not yet have guidance related to ADP corrections and Roth catch-up contributions.

The answer to your question will hinge on whether we will look at the plan year for which the deferrals were made into the plan, or the calendar year in which the ADP refund is classified as a catch-up.  The former would seem to the be practical way to go, and any ADP refund from a 2023 plan year test that could be left in the plan as a catch-up for a person who is High Paid in 2024 would not have to be Roth.

 

[Lou S.]

I'm not so sure I agree. I do dislike off calendar 401(k) plan years for some the sticky questions surrounding catch-ups but under current rules if you recharacterize contributions as Catch-up in an off calendar year plan to pass ADP testing (as opposed to exceeding the 402(g) limit which is always the calendar year occurring) then that  recharaterization is considered a cacthup as of the last day of the Plan year which would be for the calendar year in which the plan year ends.

As such a non calendar year plan that ends after 12/31/2023 would seem to require making that catchup recharacterization as ROTH to remain in the Plan.

Absent additional guidance from the IRS on the subject.

Just one of a number of things where we need additional guidance.

[Gilmore]

So let's say the plan year ends 4/30.  In 2023 a participant defers all of their deferrals for 2023 on 12/31/2023 ($30,000).  Then from 1/1/2024 to 4/30/2024 they defer another $10,000.  I'm assuming that $32,500 is used in the ADP for 4/30/2024.  $22,500 from 2023 and $10,000 in 2024.  

Assume the 2024 limits are the same as 2023.  ADP fails and the refund is $3000.  Since the 2024 catchup limit would apply, I am assuming that the $7500 deferred as catchup in 2023 would be allowed to remain in the plan, and $3000 of the $7500 catchup limit for 2024 is used, IF the deferrals were Roth, and can remain in the plan. 

If they were pretax, then further guidance would need to dictate how to treat the correction amount.  Would it not be inconceivable that under future IRS guidance that the participant could be given the option to take the distribution or elect a Roth conversion if the plan was permitted to allow that as an option?  Either way the funds are taxed but the participant could have the option to keep the money in the plan as Roth?