SECURE ACT 2.0 Roth Catch Up - 2-year transition period

[legort69]

 

Check this out

https://www.irs.gov/pub/irs-drop/n-23-62.pdf

[Peter Gulia]

Under to-be-published Notice 2023-62 (which the Bakers and others flag for us), the Internal Revenue Service quiets a few questions.

“[U]ntil taxable years beginning after December 31, 2025, (1) those catch-up contributions [made on behalf of § 414(v)(7)-restricted participants] will be treated as satisfying the requirements of section 414(v)(7)(A), even if the contributions are not designated as Roth contributions, and (2) a plan that does not provide for designated Roth contributions will be treated as satisfying the requirements of section 414(v)(7)(B).”

Further, the IRS practically confirms:

Self-employment income does not count to determine whether a participant is § 414(v)(7)-restricted.

An employer and an administrator may treat a non-Roth election as a Roth election if needed for a catch-up deferral to meet § 414(v)(7).

Some non-aggregation tolerances for a multiemployer or multiple-employer plan about a participant who has more than one participating employer.

[C. B. Zeller]

The second of the practically-confirmed items - the ability to treat a non-Roth election as a Roth election as needed to satisfy 414(v)(7) - is interesting. The way it is worded, I think it solves the recharacterization problem. There are still taxation issues to be worked out (hopefully to be addressed in the forthcoming guidance) but it should allow plan administrators to treat a deferral as Roth once it is recharacterized as catch-up due to, for example, failing the ADP test.

[Peter Gulia]

C. B. Zeller, do you think some of those changes should be presented as an implied-assent election with an opt-out opportunity? For example:

We presume you want your deferrals made as Roth contributions, rather than not made at all, if tax law does not permit a portion of your deferral to be made as non-Roth contribution. But if you prefer no deferral for the portion that cannot be made as non-Roth contributions, please let us know as soon as you can and no later than nn days from this email.

[C. B. Zeller]

Should be presented to employees as such? Yes, I think that makes a lot of sense from a practicality standpoint, plus it's good policy. If the employer were required to obtain new elections from all affected employees, it could be a significant administrative burden. Many employers allow employees to make changes to their 401(k) elections on a frequent basis, so if an employee who would have preferred to receive cash instead of a Roth deferral fails to realize the impact of their implied assent, they would not have to wait long to correct it for future periods.

[Bri]

Agree with Peter here - I would suspect some HCE somewhere would rather have the refund, if they don't want a Roth account.

[Below Ground]

On 8/27/2023 at 6:30 AM, Peter Gulia said:

Under to-be-published Notice 2023-62 (which the Bakers and others flag for us), the Internal Revenue Service quiets a few questions.

“[U]ntil taxable years beginning after December 31, 2025, (1) those catch-up contributions [made on behalf of § 414(v)(7)-restricted participants] will be treated as satisfying the requirements of section 414(v)(7)(A), even if the contributions are not designated as Roth contributions, and (2) a plan that does not provide for designated Roth contributions will be treated as satisfying the requirements of section 414(v)(7)(B).”

Further, the IRS practically confirms:

Self-employment income does not count to determine whether a participant is § 414(v)(7)-restricted.

An employer and an administrator may treat a non-Roth election as a Roth election if needed for a catch-up deferral to meet § 414(v)(7).

Some non-aggregation tolerances for a multiemployer or multiple-employer plan about a participant who has more than one participating employer.

Peter, I find myself confused by the "self-employment income does not count to determine whether the participant is 417(v)(7) restricted.  Does this mean that with a 401(k) Plan covering self-employed individuals that the Catch-Up must be Roth doesn't apply even if say that person Schedule C Income is $500,000?  Sounds like people with W-2 Income are being punished versus "Schedule C/K-1 Income People"?

 

[Peter Gulia]

Yup. A firm’s employee with § 3121(a) wages more than $145,000 would be § 414v)(7)-restricted to catch-up deferrals as Roth contributions while the firm’s partner with a million-dollar draw (but no wages) has her choice between Roth and non-Roth contributions.

That’s how the statute reads, and the IRS confirmed it.

Whether that’s fair or decent we leave to the Members of Congress.

[Luke Bailey]

2 hours ago, Below Ground said:

Sounds like people with W-2 Income are being punished versus "Schedule C/K-1 Income People"

When I first noticed this in reviewing the bill back in January, I figured it was a drafting error, but one that couldn't be solved administratively. That is still my view. Does anyone think it's not an error, e.g. there is some technical issue with having it apply to self-employment income. I don't see it, but maybe I've overlooked something.

[MoJo]

14 hours ago, Peter Gulia said:

Whether that’s fair or decent we leave to the Members of Congress.

Somehow I seem to find the use of "fair or decent" adjacent to "we leave to the Members of Congress" to be quite humorous, if not distressing....

[Peter Gulia]

Luke Bailey, I see no reason Congress could not have legislated § 414(v)(7)’s restriction to a self-employed individual with more than $145,000 in §§ 1401-1402 self-employment income attributable to the trade or business that is the plan’s sponsor or participating employer.

I’m unaware of a Congressional document suggesting the provision Congress might have intended is anything different than the provision Congress enacted.

I doubt there is much lobbying interest in pursuing a law change to restrain choices of self-employed individuals.

But we can imagine extending § 414(v)(7)’s Roth-ing to self-employed individuals might be among the possibilities the next time Congress seeks revenue gainers to balance a reconciliation’s Revenue Effects scorecard.

[Luke Bailey]

3 hours ago, Peter Gulia said:

I doubt there is much lobbying interest in pursuing a law change to restrain choices of self-employed individuals.

But we can imagine extending § 414(v)(7)’s Roth-ing to self-employed individuals might be among the possibilities the next time Congress seeks revenue gainers to balance a reconciliation’s Revenue Effects scorecard.

Agreed, but relevant to both your points, Peter, I wouldn't completely disregard the possibility that there are folks at Treasury and IRS who are embarrassed by the mistake and will work with staff on the hill to bring consistency to this provision.