Roth/Catch-up and Off-Calendar Year Plans

Am I correct in thinking that, since the determination for who is a high-earner for purposes of catch-up contributions is based on the calendar year, and catch-ups are generally determined based on the calendar year, then all plans with 2023 high-earners would need to have Roth available starting January 1, 2024 to allow catch-ups after January 1, 2024, even if the plan is an off-calendar year plan? 

Let's say I have a 401(k) plan with a 6/30 plan year end, and currently does not allow Roth.

I think I'm correct that the determination of the high-earners for purposes of determining whose catch-up must be Roth is still determined using the 2023 calendar year.  

So let's say I start the new plan year 7/1/2023 with no Roth provisions.  I come to 12/31/2023 and determine there are participants that earned more than $145,000 in 2023.  Some of those participants like to front-load their deferrals early in the year.  

Would I be correct that we could not allow any catch-up from 1/1/2024 to 6/30/2024 if we do not amend the plan before 6/30/2024, since we have high-earners in the prior calendar year, and no Roth option?

If we do amend the plan starting 7/1/2024, then everyone would then have the opportunity to make their 2024 catch-ups?

Thanks.

Excellent questions! and you probably will not be thrilled with the information available to us.  Here is the relevant Section from SECURE 2.0:

"SEC. 603. ELECTIVE DEFERRALS GENERALLY LIMITED TO REGULAR CONTRIBUTION LIMIT.

(a) Applicable Employer Plans.—Section 414(v) is amended by adding at the end the following new paragraph:

“(7) CERTAIN DEFERRALS MUST BE ROTH CONTRIBUTIONS.—

“(A) IN GENERAL.—Except as provided in subparagraph (C), in the case of an eligible participant whose wages (as defined in section 3121(a)) for the preceding calendar year from the employer sponsoring the plan exceed $145,000, paragraph (1) shall apply only if any additional elective deferrals are designated Roth contributions (as defined in section 402A(c)(1)) made pursuant to an employee election.

“(B) ROTH OPTION.—In the case of an applicable employer plan with respect to which subparagraph (A) applies to any participant for a plan year, paragraph (1) shall not apply to the plan unless the plan provides that any eligible participant may make the participant's additional elective deferrals as designated Roth contributions."

The yellow highlight says we uses the definition of wages in section 3121(a) for determining who is High Paid earning over $145,000.  This may not be the same definition of compensation defined in the plan as plan compensation so payroll has some work to do.

The orange highlight says the $145,000 is based on the preceding calendar year.  Forget about off-cycle plan years.

The light blue highlight references participants "for a plan year" to whom the High Paid definition in subparagraph (A) applies.  It is not clear how reference to plan year is applicable (any part of a plan year? all of a plan year?).

Thank you Paul, very much.  

Here's a followup question, and I realize there likely is not an answer at the moment.

Let's say we amend the plan effective 7/1/2024 for the plan year ending 6/30/2025.  Normally we could operationally allow Roth as long as an amendment is adopted by 6/30/2025, correct?  But by not actually adopting the amendment before 12/31/2024, does that then negate anyone from making catch-up in 2024?

I realize for most the plan is amended first if for no other reason than it is easier to produce participant communications with the plan already amended.  I'm just trying to figure out how much wiggle room there is for the inevitable inadvertent errors that are likely to come with this new rule.

I do believe we need to wait for more guidance for to make something more than an educated guess.  There also is the need for Congress to undo the unintended repeal of all catch-up contributions which should spur some more information coming sooner than later.

A reading of this provision is everyone must have the ability to make Roth catch-up contributions and the High Paid employees can only make Roth catch-up contributions.  This translates into if you want catch-up contributions in the plan, you have to add Roth.

There is the conundrum that you cannot make Roth deferrals until the plan specifies the effective date, and this concept of make an administrative decision today and formally amend the plan later.  Is it a fantasy to think the IRS could be that explicit about Roth deferrals?