New Roth Catch-Up Rules

[Connor]

We work with a large financial institution that has sent us a sample correspondence that they plan to send to their 401(k) clients.  It states that if a plan does not permit Roth deferrals, participants whose FICA wages were $150k of less in the prior year can continue to make catch-up contributions on a pre-tax basis, but those whose wages exceed this limt are not permitted to make any catch-ups.  The research we have done on this topic seems to suggest that though it's possible to have a plan operate in this manner, it's not recommended, as such an arrangement can create discrimination issues.  If this is true, we are surprised that an investment firm, which has a popular recordkeeping platform, would push this method without at least caveating the downside.  Do we have a correct understanding of the new rules in this regard? 

[justanotheradmin]

What would you propose as an alternative?

The decision to amend the plan to allow for Roth is made above the participant level. If the plan is not amended, then the proposed participant communication seems appropriate. 

Unless the financial institution has discretion to make plan decisions, including to amend plans to allow Roth contributions(or disallow catch-up), I don't see any alternative. 

Plans are not required to offer Roth or disallow catch-up. Many the financial institution / recordkeeper do not charge enough or have a set-up that allows a lot of personalized customized plan design and follow-through, depending on the size of the plan. Unless they are on a service level where the financial institution is going to contact each affected plan  sponsor personally, and educate them on the pros and cons of amending or not, I don't see it changing. 

Does the financial institution also maintain the plan's document for these clients? If not, they really aren't in a position to do much else. 

What is your role? If you are an advisor or TPA, those are the service providers I see doing more education with plan sponsors if a plan does not allow for Roth, but does allow for catch-up. I have had a number follow-up with sponsors throughout the year to educate and see if they would agree to plan amendments. 

[Peter Gulia]

In Connor's originating post's first sentence, there is an ambiguity about whether "401(k) clients" refers to plan sponsors, participants, or something else.

Connor, you mention that the service provider sent you something that it plans to send (but maybe has not sent to its ultimate audience). Does that service provider invite your comment? Does it ask you to do something, or be mindful of something, before the communication gets to its audience?

[austin3515]

I'm curious to know what your role is with these clients?  From a compliance perspective this is all quite complicated.  If you work for a TPA I hope someone at your firm has a solid grasp of this stuff.  If you work for a financial advisors office, you're definitely asking the right questions but you're going to want to get someone involved who has the right expertise.  They might be available at the recordkeeper if you ask for it.  They will not be proactive because the scale is too large as others have noted.  But most of them will go over things if you call them.

But I can make this a little easier for you. Add Roth.  It's a good benefit, and plans without Roth are becoming closer to Unicorns every day.  Note that you have plenty of time to add Roth in order to avoid the limitations since most people are not doing any catch-ups until at least June (most likely not until Q4 2026).  I think most TPA's and recordkeepers were pretty aggressive about getting Roth added over the last year or two, if they didn't already have it.

I know some clients didn't add Roth to keep it simple, I get that.  And that was probably a more defensible position before these mandatory Roth rules.  But low income people in particular (who pay little or no taxes) are better off doing Roth.  There was a great article today by Carol Calhoun who mentioned that anyone eligible for the tip income and overtime income deductions is making a mistake contributing pre-tax because they are converting tax free income to taxable income (I'm paraphrasing).

https://benefitsattorney.com/bad-tips-for-401ks/

[Artie M]

Based on your description, I am not seeing the discrimination issue:  "participants whose FICA wages were $150k or less in the prior year can continue to make catch-up contributions on a pre-tax basis, but those whose wages exceed this limit are not permitted to make any catch-ups."  So, here, the over $150K participants do not get catch-ups (because they have to be Roth).  So they took away something from the more highly compensated.... Under the Code, there cannot be discrimination against NHCEs... no rule says you can't discriminate against HCEs.    The discrimination issue comes up if a Plan has participants who do not earn FICA wages and they are HCEs for nondiscrimination testing but not highly paid individuals for Roth catch-up purposes.  In that situation HCEs who are not HPIs might be able get catch-ups but some NHCE who are HPIs could not get catchups.   That is a very specific set of circumstances.  This set of circumstances is addressed in the regs that provide a safe harbor if those HCEs who are not HPIs are not eligible for catch-ups either.  If you don't use the safe harbor the Plan would need to do BRF testing (and may or may not fail it).  Those same regs say you can design a plan permitting catch-ups but does not permit Roths.  The communications piece you read may be meant for the general population and not for a plan with this specific set of facts.  Maybe I am misunderstanding the query.... 

[Connor]

Thank you for your responses.  I suppose I should've been a little more specific - the letters are going to the plan sponsors, not the participants, and their only call to action to us was the generic 'please call with any questions'.  Most of the plans have participants numbering in the dozens, so no large plans, but some do have both W-2 participants and those who receive SE income - some even have participants who get both types of income.  

Though we are the bookkeepers, clients have occasionally asked for our take on the new rules and their options.  We explained that, like many regulations, there are many ins and outs, and we only know the most general basics.  We also remind them to talk to those who specialize in such matters.    

Artie M I think what you're saying is the missing part for us, as the articles and newsletters we've read (and there were quite a few) didn't delve as deep into the issue.  Are the regs that you are citing found in the final SECURE 2.0 regs that recently came out?   

I'm with you Austin3515 about just adding Roth, as long as the payroll services don't make us regret it.

 

 

[Artie M]

@Connor  https://www.federalregister.gov/documents/2025/09/16/2025-17865/catch-up-contributions