SECURE 2.0: Classifying catch-ups as roth for ADP testing in 2024

Section 603, Elective deferrals generally limited to regular contribution limit. Under current law, catch-up contributions to a qualified retirement plan can be made on a pre-tax or Roth basis (if permitted by the plan sponsor). Section 603 provides all catch-up contributions to qualified retirement plans are subject to Roth tax treatment, effective for taxable years beginning after December 31, 2023. An exception is provided for employees with compensation of $145,000 or less (indexed).    

Maybe someone else has a different view, but I don't see why this revision has any impact on recharacterization. I still have plenty of reading to do, but I would expect that we could still recharacterize deferrals as catch-up to satisfy ADP testing but there would be a taxable event for the HCE to convert it to Roth. Very curious to hear other opinions or if there is something in SECURE 2.0 specifically addressing this that I have yet to read.

IRC 414(v)(7)(A) (as added by SECURE 2.0) says that if a participant exceeds the comp limit, paragraph 414(v)(1) (which covers all types of catch-up contributions, including ADP catch-up) does not apply unless the contributions are designated Roth contributions "made pursuant to an employee election."

The election to treat a deferral as a Roth contribution must be made at the time of the contribution, 1.401(k)-1(f)(1)(i).

It's not unreasonable to read these together to say that if the deferrals were not contributed as Roth at the time they were made, then they could not be used for catch-up, including for ADP catch-up.

If IRS wants to allow pre-tax deferrals to be retroactively recharacterized as Roth catch-up to avoid their having to be distributed from the plan on a failed ADP test, they will need to provide some guidance.

It sounds as if there will no longer the ability to recharacterize deferrals under a failed ADP Test unless they were originally contributed as Roth Deferrals.  For many plans this will basically mean the plan has no value and should be terminated since it is only by recharacterizing deferrals that the HCE can make a reasonable deferral.

I think we're going to see a few owners paying themselves $144,999.99 in salary this year.

Might push more plans toward Safe Harbor design.

It's going to take more than a year to sort all of this out won't it?  Maybe it's just me but I predict a ton of people making catch-ups on a pre-tax basis who were only eligible to make Roth catch-ups. I just don't think payroll software is programmed with a "lookback" feature to determine who is pre-tax catch-up eligible or not.  I can't think of a single other payroll item where a "lookback" is required.  It may sound simple but the mere act of a payroll software program going into a prior year to look at year-to-date pay (415 pay in particular no less) to check for this catch-up eligibility seems incredible.  OK fine maybe ADP and PayChex will pull this off, but I just can't see Quickbooks doing it. 

This is really going to be an operational disaster. 

It ain't going to be fun. The solution? Buy lottery tickets!! Odds of winning are about 1 in 320 million or so, and the jackpot is 600 million or so. So if you buy 320 million tickets, you are guaranteed of winning and making a huge profit so you can retire!! (I'm using government accounting mathematics.)

1. Very glad I don't do this type of admin work any more.

2. I think this is certainly a government objective, make tested plans ridiculously complex to administer and "incentivize" sponsors into SH designs.

1 hour ago, Belgarath said:

push more plans toward Safe Harbor design

3. All you need is a Fidelity or Vanguard or the like to tell IRS, DOL and/or Congress that they can't ready their systems in time and this will all get pushed back another year or two. Or, God forbid, maybe they will be the only ones ready in time and we'll all be retired or working for them.

4. Good luck

The Senate Finance Committee’s EARN Act would have prohibited recharacterization. That prohibition was not in the final law. With the ability to have in-plan Roth rollovers, seems like a pre-tax excess contribution could be converted to a Roth catch-up. Then the question is which year is it taxable. I’d say the year of the conversion just as though there had been a distribution of the excess. Of course this is just an interpretation and we’ll hopefully have IRS guidance before this goes into effect. 

But what if a plan does not allow Roth deferrals at all?

17 minutes ago, BG5150 said:

But what if a plan does not allow Roth deferrals at all?

My read of 414(v)(7)(B) is that if you have any participant who is at least age 50 with compensation above the limit, then you have to allow Roth if you want to allow catch-up contributions at all.

Will there be a snap-on amendment? (I know it's way too early)

3 hours ago, BG5150 said:

Will there be a snap-on amendment? (I know it's way too early)

Off course! But I doubt we will have guidance before 2024...

23 hours ago, RatherBeGolfing said:

Off course!

Pun(s) intended?

47 minutes ago, CuseFan said:

Pun(s) intended?

Off course!