60-63 Catch-ups Automatically Incorporated Relius Documents

[austin3515]

I submitted this question to Relius a well but curious if you are all in agreement:

My reading of the Relius 403(b) document and the Corbel formatted 401k prototype document is that the 60-63 catch-ups will automatically be added because those documents merely reference "up to the catch-up limits". And now that limit is just higher for ages 60-63.

Have others come to the same conclusion? I believe I saw an FT William email taking the position that this was their reading of their own document, which was what got me thinking.

[Peter Gulia]

Your description about how some might interpret a current plan document—especially if it sets a provision by referring to relevant Internal Revenue Code sections, rather than by a narrative text that describes only what the law was when the document was written—makes sense.

But for many, it might matter less what the documents state today, and more what the documents provide when a user next adopts a remedial amendment or restatement.

Current administration

For those who wait to amend “the” plan document and administer a plan assuming tax law’s remedial-amendment tolerance, during the remedial-amendment period one might administer a retirement plan according to the later-written plan that tax law treats as having retroactive effect.

During a remedial-amendment period, this would leave uncertain which optional provisions a plan’s sponsor adopts or omits (and so which provisions the plan’s administrator ought to administer). Many service providers resolve some of those uncertainties by asking a customer to instruct which provision—on or off, yes or no—the service provider is instructed to follow in performing its services. Many of those requests for a service instruction communicate a norm or default choice the service provider may presume absent a specific (and proper) instruction otherwise.

About the 60-63 catchup, a likely default is that the extra range is on until the customer tells its service provider to take it off. Some recordkeepers might not offer a choice: that is, a service for an age-based catch-up is grounded on all or none.

Some communications are ambiguous. At least one big recordkeeper says: “If a plan currently permits age-50 catch-up contributions, there is no additional plan election required. [XYZ] will automatically apply the [60-63] increased contributions effective 1/1/25 to those plans.” While this says one need not deliver an instruction if the plan sponsor likes 60-63 catch-up, it does not say whether the recordkeeper would accept a customer’s instruction to allow an age-based catch-up only up to the limits for a 50-year-old without the extra range for 60-63.

How much choice will the upcoming cycle’s plan-document forms allow?

From lawyers who are designers and writers of IRS-preapproved documents, I’ve heard that they and the business executives they answer to struggle with how much choice to put in the forms. Some want to afford every choice tax law permits (unless the IRS’s review would preclude a choice tax law permits). Others, to make the documents shorter or a little less tedious in asking for a user’s choices, seek to restrain choices they believe few users want.

austin3515, consider making known to plan-document designers (at least the publisher your clients use) your observation about why some employers might prefer to omit the 60-63 catch-up range.

[RatherBeGolfing]

21 hours ago, austin3515 said:

Have others come to the same conclusion? I believe I saw an FT William email taking the position that this was their reading of their own document, which was what got me thinking.

ASC has taken the same position.  Absent guidance permitting us to treat 60-63CU separate from regular CU, if the document allows for CU, the 60-63CU limits are automatically applied.

[Peter Gulia]

RatherBeGolfing, thank you for telling us about ASC’s reading.

If a plan sponsor prefers to provide an age-based catch-up only for the age 50 limit without the 60-63 extended limit, may one so limit the catch-up if the plan sponsor documents those provisions by the end of the remedial-amendment period?

(I don’t advocate this, but do seek to learn those contours of the remedial-amendment regime. And whether it’s practically feasible.)

[Gina Alsdorf]

I am just going to put out there that this is one of the silliest parts of secure 2.0.  That and making the mandatory Roth catch-up highly paid individuals not the same as the HCE number.  It makes so little sense, and creates needless complication.   

[Paul I]

Reading Section 109 of SECURE 2.0, the change adding the availability of the increased catch-up limit for participants aged 60-63 does not appear to be optional.  This increase is part of the definition of the overall catch-up limit.  If so, then the only option a plan has is to permit catch-ups or not to permit catch-ups.  If the plan chooses to permit catch-ups in 2025 and going forward, then the plan must permit the increased limit for participants aged 60-63.  (I recently have seen a statistic that something like 98% of 401(k) plans allow for catch-up contributions.)

While we are on the topic of catch-ups, there are some other related points to keep in mind:

• Section 109 notes the "adjusted dollar 19 amount, in the case of an eligible participant who would attain age 60 but would not attain age 64 before the close of the taxable year" so beginning January 1, 2025, a participant who on January 1, 2015 is at least age 59 (i.e., would attain age 60 before the close of the tax year) and under age 63 (i.e., would attain age 64 before the close of the tax year) will be able to make catch-ups up to the increased limit.
• Catch-up contributions are subject to an universal availability requirement applicable to all plans sponsored by the employer and any related employers.
• If the plan includes Long-Term Part-Time Employees (LTPTEs) from 401(a)(4), ADP, ACP and 410(b) testing, then if the plan allows catch-ups, the plan has to allow the LTPTEs to make catch-ups.  If the plan excludes LTPTEs from all of these tests, the plan could exclude LTPTEs from making catch-up contribution.
• Payroll service providers are on the critical path to implement the new limits.
• Cycle 4 restatements likely will start in late 2026 with the cylce ending in 2028.  IRS Notice 2024-3 includes the 2023 Cumulative List of Changes in Plan Qualification
  Requirements for Defined Contribution Qualified Pre-approved Plans which includes the age 60-63 catch-up limit.

@Gina Alsdorf's observation about the coming mandatory Roth catch-ups for High Paid participants is fair warning to all other service providers who will be significantly impacted by that change.  At least this change does not appear in the 2023 LRMs.

All of the above may be particularly valuable for those practitioners who are contemplating retirement. 😀

 

 

 

[austin3515]

1 hour ago, Gina Alsdorf said:

I am just going to put out there that this is one of the silliest parts of secure 2.0.  That and making the mandatory Roth catch-up highly paid individuals not the same as the HCE number.  It makes so little sense, and creates needless complication.   

You forgot the part about the mandatory Roth catch-ups determination being based on Social Security Wages.  An oversight I'm sure!

[C. B. Zeller]

10 minutes ago, Paul I said:

Reading Section 109 of SECURE 2.0, the change adding the availability of the increased catch-up limit for participants aged 60-63 does not appear to be optional.  This increase is part of the definition of the overall catch-up limit.  If so, then the only option a plan has is to permit catch-ups or not to permit catch-ups.  If the plan chooses to permit catch-ups in 2025 and going forward, then the plan must permit the increased limit for participants aged 60-63.  (I recently have seen a statistic that something like 98% of 401(k) plans allow for catch-up contributions.)

I'm not sure if I agree. The definition of the universal availability rule in 1.414(v)-1(e) only requires that all catch-up eligible participants have the opportunity to make the same dollar amount of catch-up contributions. It does not require that a plan permit participants to make the maximum amount of catch-up contributions permitted under the law. So a plan could say that catch-ups are allowed, but we are limiting catch-ups to $1000. And if they could do that, it seems like they should be able to limit catch-ups to the regular (50-59,64+) catch up limit as well.

[Peter Gulia]

The extra tolerance Internal Revenue Code § 414(v) provides starts with § 414(v)(2)(A): “A plan shall not permit additional elective deferrals under paragraph (1) for any year in an amount greater than . . . .”

Even without the 60-63 extra range, some might read § 414(v) to allow a plan to provide some “additional elective deferrals” while limiting them to an amount less than the maximum amount § 414(v) permits a plan to allow.

The recent cash-or-deferred arrangement LRMs, at its page 6, includes this:

(Note to reviewer: For taxable years beginning after December 31, 2024, Section 109 of the SECURE 2.0 Act of 2022 increases the catch-up limit to the greater of $10,000 or 150 percent of the age 50 catch-up limit in effect for the year for individuals who will attain ages 60, 61, 62 and 63 during the tax year. After 2024, the $10,000 limit is adjusted by the Secretary of the Treasury for cost-of-living increases. Plan language and adoption agreement elections can include this secondary catch-up limit for those periods.

https://www.irs.gov/pub/irs-tege/coda-lrm0124-redlined.pdf (emphasis added).

[austin3515]

Right about now would be a great time for the IRS to weigh in 🤪

[Paul I]

@C. B. Zeller & @Peter Gulia, I am not advocating for or against a plan being allowed to specify a catch-up limit.  I will observe that I took a look at a half-dozen pre-approved plan adoption agreements and the language in their underlying basic plan documents, and interestingly none of them give the plan sponsor the option to choose a catch-up limit (i.e., there is no blank that says fill in the catch-up deferral -limit).

[Peter Gulia]

For when tax law’s catch-up maximum was the same for all those 50 and older, it doesn’t surprise me that designers of IRS-preapproved documents made an adoption-agreement form simpler and shorter by omitting a line to specify a limit less than tax law’s maximum.

But about whether to afford a choice to omit the 60-63 catch-up range while providing a 50-and-older catch-up, we won’t know a plan-document publisher’s business decision until we see the next cycle’s forms.

[austin3515]

46 minutes ago, Peter Gulia said:

But about whether to afford a choice to omit the 60-63 catch-up range while providing a 50-and-older catch-up, we won’t know a plan-document publisher’s business decision until we see the next cycle’s forms.

Well they could tell us.  I am waiting for Relius to respond to me on this question.  I did suggest that now would certainly be a good time for them to tell us what they think.  But then I'm sure the answer is "we're waiting for the IRS to tell us what they think."  Kinda hard to argue with that.

[Peter Gulia]

austin3515, your plan-documents provider should give you a candid answer about what it intends to submit as the forms on which it seeks IRS approval.

The recent cash-or-deferred arrangement LRMs, at its page 6, includes this: “. . . .  Plan language and adoption agreement elections [plural] can [not must] include this secondary catch-up limit [the 60-63 extension] for those periods [after 2024].” https://www.irs.gov/pub/irs-tege/coda-lrm0124-redlined.pdf. (The whole paragraph is posted above.)

This suggests the IRS is open at least to consider an adoption-agreement form that lets a user specify an age-based catch-up without the 60-63 extension, a plan-design choice you suggested in another BenefitsLink discussion.

To your businesslike question about what your plan-documents provider will design and could submit, a we’re-waiting-on-the-IRS response shouldn’t be enough.

[austin3515]

1 hour ago, Peter Gulia said:

To your businesslike question about what your plan-documents provider will design and could submit, a we’re-waiting-on-the-IRS response shouldn’t be enough.

Well I'm still waiting on their response so perhaps they will surprise me.  But if I were drafting amendments and giving counsel about brand new legislation, and knowing that advice will affect thousands (nay, tens of thousands of plans), and I knew there was this much ambiguity in the law, I think I would try and delay until the IRS at least told us what they thought.  Wouldn't it be a shame to have to come back to all their clients with their tail between their legs and say "Well I think I was right but the IRS disagreed so everything I told you shouldn't be relied upon."  That's not a position I would like to be in.

And not for nothing, but this decision for sure is not in a vacuum.  I would be shocked if every payroll company out there is trying to accomodate this new catch-up limit, and I'll bet a million dollars they're not asking their clients if they want to take advantage of that new feature.  They are just turning it on when it's ready for all of their clients.   I have no proof of this of course, but I'm pretty sure I'm right!

 

[Peter Gulia]

I was suggesting some inquiry only because you had suggested that some plan sponsors might prefer not to provide the 60-63 extension, if given that choice.

A plan-documents publisher need not now risk saying something the IRS might disapprove because a publisher need not, and usually does not, express to the documents’ users a conclusion on a point like this until the IRS’s review ends.

At the current stage—when a plan-documents provider hasn’t yet finished what it decides to submit for the IRS’s review, no one need state a conclusion on the point of law. Rather, a plan-documents provider could consider your idea that at least some plan sponsors might welcome a choice, and could tell you whether they’re willing to ask the IRS to allow the choice in an adoption agreement. That answer might be no, but one can’t get what you don’t ask for.

If this point matters to you, now would be the time to ask. Relatively soon, the plan-documents providers will submit their applications for IRS approval. That review process filters not only questions about the IRS’s interpretations of law but also about what the IRS wants to allow or preclude in IRS-preapproved documents.

For some questions, it’s impossible or impractical to delay a decision until the IRS has expressed the IRS’s thinking. Come next January (or whenever the extended submission date is), an applicant for the IRS’s approval of a plan-documents set must decide what to submit. An applicant must finish those business decisions with as much or as little information about the IRS’s views as one knows before the submission date. One gets the IRS’s response during the review.

We recognize service providers tend to cautious expressions about law. When I was inside counsel for a recordkeeper, our business executives knew our decisions would affect tens or hundreds of thousands of plans with millions of participants and billions in plan assets. And the lawyers knew we were indirectly setting courses for many plans, most of which would get no tax or legal advice. But those responsibilities didn’t stop us from considering a question of law or a business decision, considering it internally before anything might be expressed to customers or even to our customer-service people.

I don’t know about Relius, but other plan-documents designers have been and still are considering suggestions from third-party administrators and other intermediaries about which plan-design choices they want for their clients. austin3515’s query might not get as much attention as Empower’s query gets, but a smart plan-documents designer might listen to a thoughtful question.

About a plan-design point like this, a recordkeeper, payroll-service provider, plan-documents publisher, or other service provider often prefers to avoid even suggesting a choice. Many of them might wish that intelligent practitioners like you would just go away.

Yet, how much a plan-design choice matters and whether you want to ask for a chance to facilitate it is your business decision. (Looking at a path-of-least-resistance mainstream, one might find that seeking a plan-design choice isn’t worthwhile.)

I recognize much of what I describe is about managing uncertainty. But that inheres in tax and other laws about retirement plans, especially tax law’s remedial-amendment regime and its delays in what “the” plan document provides, purportedly retroactively.

As practitioners, guiding a client through uncertainty can be an important part of what we do. If it were easy, a client might not need us.

[RatherBeGolfing]

14 hours ago, austin3515 said:

But if I were drafting amendments and giving counsel about brand new legislation, and knowing that advice will affect thousands (nay, tens of thousands of plans), and I knew there was this much ambiguity in the law, I think I would try and delay until the IRS at least told us what they thought.  Wouldn't it be a shame to have to come back to all their clients with their tail between their legs and say "Well I think I was right but the IRS disagreed so everything I told you shouldn't be relied upon."  That's not a position I would like to be in.

As far as amendments go, I think most of the providers have been clear, absent guidance that would allow us to treat them as separate catch-ups, they are treated the same.  I would not expect a provider to draft the S2.0 amendment any other way.

Restatements are a different animal.  You can draft the C4 document aggressively even without guidance and let the IRS tell you Yay/Nay.

[austin3515]

On a seperate note, curious to know if others agree or perhaps have heard that payroll companies are implementing this as a modification of existing catch-up rules, and not an optional provision to "opt into."  I just think their payroll systems are going to calculate the limit differently as a result of this change.  They have already made decisions on how to proceed here since it is effective in just 4 months.  Has anyone heard from the likes of ADP/PayChex/Paylocity, etc?

[Peter Gulia]

And for an employer that runs its payroll internally without using ADP, Paychex, or a similar provider but using commercially developed software, what deferral-limit rules (if any) do those developers put in their software?

[austin3515]

9 minutes ago, Peter Gulia said:

And for an employer that runs its payroll internally without using ADP, Paychex, or a similar provider but using commercially developed software, what deferral-limit rules (if any) do those developers put in their software?

I've given many presentations on S2.0 and this is something I bring up a lot.  A lot of payroll is done only as a means to an end with respect to a larger operational system.  I have a trucking company as a client, and they use software that does payroll, sure, but also tracks everything about miles driven, trucking routes, assigning jobs to truckers, tracking the trucks (maintenance, miles,, etc.)  Are they really going to spend a bazillion dollars on this?  I hope the answer  is yes but really who knows.

[jsample]

As far as ADP "the recordkeeper", their website has the following:

Catch-up Contribution increase, aged 60 - 63:  ADP is currently evaluating this provision and will release more comprehensive information as we approach the effective date.  For those using the ADP prototype Plan Document, ADP will include this provision in an interim amendment.

I agree that the payroll providers more than likely are scrambling right now.  We have a local payroll company that services most of the local businesses in the area.  They currently have no idea how to accomidate this by 1/1/2025.

[Carlos Ribeiro]

On 9/9/2024 at 12:03 PM, Paul I said:

is at least age 59 (i.e., would attain age 60 before the close of the tax year) and under age 63 (i.e., would attain age 64 before the close of the tax year) will be able to make catch-ups up to the increased limit.

I was assuming that if you turn 64 anywhere during tax year you would not be eligible.

We build software and are exactly as confused as you may imagine. Now our attention is turned to how to define the employee is not eligible.

By reading I.R.C. § 414(v)(2)(B)(ii), "an eligible participant who would attain age 60 but would not attain age 64 before the close of the taxable year", I infer that if the employee turns 64 anywhere within the tax year (let's december) they are already ineligible.

 

On 9/10/2024 at 2:10 PM, jsample said:

I agree that the payroll providers more than likely are scrambling right now.  We have a local payroll company that services most of the local businesses in the area.  They currently have no idea how to accomidate this by 1/1/2025.

I can relate to that 😿

[austin3515]

If you turn 60 at any time in 2025, you are eligible in that year for the whole year.  You will therefore turn 63 in 2028. Because you turn 63 in 2028 you will of course not turn 64, so 2028 is the last year. So 2025, 2026, 20278 and 2028 is 4 years (60, 61, 62 and 63).  So your assumption is correct.

Happy Coding to you!!