SECURE 2.0 Section 603 - another Roth catch-up question

[WCC]

I listened to a webinar today presented by a well-known industry expert. He made a comment about SECURE 2.0 Section 603 that surprised me. He made the comment that to simplify the administration of Roth catch-ups, a plan sponsor could amend the plan to only allow catch-ups in the form of Roth for everyone. I thought I must have misunderstood him because to me the proposed regs and final regs seem very clear that this is not allowed. However, when questioned, he commented that he believes the IRS will allow this and the third party document providers are preparing for this. 

Does he know something that no one else knows? Has anyone else heard rumors of the IRS taking this stance?

Thanks

[Peter Gulia]

Consider:

Plans limiting pre-tax catch-up contributions for employees not subject to section 414(v)(7).  The rules of [26 C.F.R. § 1.414(v)-2(b)(3)(i)] also apply to a plan that includes a qualified Roth contribution program and, in accordance with an optional plan term providing for aggregation of wages under [26 C.F.R.] § 1.414(v)-2(b)(4)(ii), (b)(4)(iii), or (b)(4)(iv)(A), does not permit pre-tax catch-up contributions for one or more employees who are not subject to section 414(v)(7).

26 C.F.R. § 1.414(v)-2(b)(3)(ii) https://www.ecfr.gov/current/title-26/part-1/section-1.414(v)-2#p-1.414(v)-2(b)(3)(ii).

[TPABob]

@WCC, I agree, that doesn't seem right.

The explanation is long, but this is what the final Regulation says in Section I under the Summary of Comments and Explanation of Revisions section, which seems to clearly indicate that a plan can not require all catch-up contributions to be Roth for everyone:

"While proposed §1.401(k)-1(f)(5)(iii) would permit a deemed Roth election with respect to a participant who is subject to the Roth catch-up requirement, the proposed regulations did not include a rule permitting a plan to require that all participants’ catch-up contributions be designated Roth contributions. Footnote 16 of the preamble to the proposed regulations explained that, for a participant who is not subject to the Roth catch-up requirement, allowing a plan design that requires all participants’ catch-up contributions to be designated Roth contributions would be inconsistent with the language of section 402A(b)(1), which provides that a designated Roth contribution must be elected by an employee “in lieu of all or a portion of elective deferrals the employee is otherwise eligible to make.”⁸

Notwithstanding the explanation in footnote 16 of the preamble to the proposed regulations, commenters requested that the final regulations permit a plan to require that all participants’ catch-up contributions be made as designated Roth contributions, regardless of a participant’s FICA wages for the preceding calendar year. Commenters argued that permitting this plan design would simplify implementation of the Roth catch-up requirement, would reduce section 414(v)(7) failures, and, in some cases, could avoid a perception of unfairness (for example, in the case of a participant who is not subject to the Roth catch-up requirement under section 414(v)(7)(A) because the participant did not have FICA wages in the prior year, but had wages from self-employment for the preceding calendar year that exceeded the Roth catch-up wage threshold). With respect to section 402A(b)(1), commenters argued that provision merely defines the term “qualified Roth contribution program,” does not explicitly prohibit a plan from requiring that all catch-up contributions be made as designated Roth contributions, and permits an employee to have designated Roth contributions “made on the employee's behalf” under the plan.

The Treasury Department and the IRS do not agree with the commenters’ characterization of the language in section 402A(b)(1) as merely a definition. In addition, the language of section 402A(b)(1) permitting an employee to have designated Roth contributions “made on the employee’s behalf” under a plan was added to section 402A(b)(1) by section 604(b) of the SECURE 2.0 Act. Section 604 of the SECURE 2.0 Act permits certain nonelective contributions and matching contributions that are made after December 29, 2022, to be designated Roth contributions. Thus, this language reflects the distinction between designated Roth contributions that are made in lieu of pre-tax elective deferrals and those that are made in lieu of nonelective or matching contributions.

Further, section 414(v)(7)(A) refers to designated Roth contributions as defined under section 402A(c)(1), and, under section 402A(c)(1), the term “designated Roth contribution” includes “any elective deferral…which is excludable from gross income of an employee without regard to [section 402A], and the employee designates (at such time and in such manner as the Secretary may prescribe) as not being so excludable.” Thus, under section 402A(c)(1), an employee must be permitted to make a pre-tax elective deferral in order for the employee to designate such a pre-tax elective deferral as a designated Roth contribution.

Although the requirement under section 402A(b)(1) and (c)(1) that an employee be eligible to make pre-tax elective deferrals in order to elect to make designated Roth contributions in lieu of all or a portion of those pre-tax elective deferrals is not consistent with the Roth catch-up requirement under section 414(v)(7)(A) in the case of a participant who is subject to the Roth catch-up requirement, final regulation §1.414(v)-2(b)(6) resolves this inconsistency by providing that the Roth catch-up requirement applies notwithstanding section 402A(b)(1) and (c)(1). However, there is no inconsistency in the case of a participant who is not subject to the Roth catch-up requirement. Accordingly, the final regulations do not include a rule permitting a plan to require that all participants’ catch-up contributions be designated Roth contributions.

⁸ Section 402A(b)(1) provides that “[t]he term ‘qualified Roth contribution program’ means a program under which an employee may elect to make, or to have made on the employee's behalf, designated Roth contributions in lieu of all or a portion of elective deferrals the employee is otherwise eligible to make, or of matching contributions or nonelective contributions"

 

[Peter Gulia]

By quoting (and hyperlinking to) a paragraph from a Treasury rule, I don’t suggest it as support for or against any interpretation. Rather, I suggest only that an interpreter (perhaps one like the webinar speaker WCC described) might consider it in forming one’s interpretation.

That said, few interpreters are ready to pursue an interpretation contrary to Treasury’s explanation in the rules’ preamble.