Roth Catch-Up Contribution

When complying with the new Roth Catch-Up Contribution provision of SECURE Act 2.0, do plan sponsors need to add Roth as an available option for all participants in the plan? It seems like they should, however we work with a plan sponsor that does not want to make it an available contribution type in the plan.  Is that permissable?

Yes. You either need to add ROTH for everyone or remove all CATCH-UPS for everyone.

16 minutes ago, Lou S. said:

Yes. You either need to add ROTH for everyone or remove all CATCH-UPS for everyone.

I would add "under current Roth rules" it must be available as a general option available for all.  Maybe (but I doubt it) the IRS will change those rules and allow a plan to offer Roth only for those people whose catch-up must be Roth....

3 minutes ago, MoJo said:

I would add "under current Roth rules" it must be available as a general option available for all.  Maybe (but I doubt it) the IRS will change those rules and allow a plan to offer Roth only for those people whose catch-up must be Roth....

I doubt they have something in technical corrections that would allow you to add ROTH catch-up only for those that have to do ROTH catch-up but not allow any other ROTH. It would seem to go counter to their budgeting of now seemingly wanting to encourage ROTH to make 10 year forecasting of revenue look better.

Also if a Plan allows ROTH I believe it has to universally allow ROTH, likewise if a plan allows CATCH-UPS it has to universally allow catch-ups.  So it would seem odd that congress would allow a plan to add ROTH only for CATCH-UPS.

But then the both Congress and the IRS have done stranger things in the past so I wouldn't put it past them, I just don't think it is likely.

Isn't the easiest technical fix just to allow Roth as a benefit for NHCEs only?  Adjust the "universal availability" to make it easier for sponsors.

15 hours ago, Lou S. said:

Yes. You either need to add ROTH for everyone or remove all CATCH-UPS for everyone.

No Roth, no catch-ups for those under the 145,000 (indexed) prior comp?

I was under the impression the less than 145,000 COULD have catch-ups in a non roth plan.....  

The concept of Roth-only catch-up contributions for High Paid participants is a pure revenue gimmick that is inconsistent with the original concepts of a catch-contribution, a Roth deferral and treatment of participants with higher incomes.

The original of a catch-up contribution is to allow participants age 50 or older to make up for lost opportunities to defer earlier in their careers.  Think child care, college expenses, and big mortgages.  Forcing the catch-up contribution to be Roth for a participant forces the participant to spend more out of their current paycheck.  A $500 pre-tax salary deferral reduces current net pay by $500 and increases current net pay by the income tax savings.  A $500 Roth deferral reduces current net pay by $500 but there is no current tax savings.  It costs a participant more out-of-pocket using Roth while trying to make up for earlier lost opportunities. 

The longer a Roth contribution is in the plan, the greater the value of the tax break at retirement, so waiting to age 50 to start Roth is a less valuable tax strategy than (if the participant can afford to) making Roth deferrals at younger ages.

Setting the High Paid threshold at $145,000 versus using the HCE threshold was acknowledged to be a pure revenue-driven decision.  This provision did not even wink at nondiscrimination as a consideration.  The end result is a whole new layer of compliance that needs to be monitored every year , and this new layer of compliance interacts with existing nondiscrimination compliance.  Think who is or is not High Paid versus HCE, or treating ADP refunds as Roth catch-up for HCE but not High Paid NHCEs.

Further, the High Paid threshold will impact a subset of the NHCEs.  A common scenario is where the children finally are financially off the parents budget and both parents now are working and trying to save more for retirement.  This provision works against them because combined household income makes them High Paid.

Since this is a revenue gimmick, it almost certainly will not go away and its future is destined to see the High Paid threshold be adjusted lower and lower (at least relative to the HCE threshold).

SECURE 2.0 made major changes, and as is often said of major changes in tax laws, it is a

"[pick your profession - accountant, actuary, attorney, consultant, TPA]'s Full Employment Act"

Below is from a recent instructional email sent by a large recordkeeper.  This is for plans that allow catch-up contributions but do not offer Roth.

• If a Plan Sponsor does not take any action, Roth Catch Up will automatically be added to the Plan effective 1/1/24 for Roth contributions only.
• We are requesting Plan Sponsors consider adding Roth Deferrals and Roth Rollovers at the same time for administrative efficiency since these changes require coordination with payroll vendors, plan document updates and communication to participants.

Doesn't this read as if they would permit the option to allow Roth contributions for catch-up only?

Jsample, it sounds like they will accept Roth catch-up contributions if the plan allow catch-contributions but does not have Roth.

Generally, a payroll service provider will be sending in the contributions so I suspect they are saying they will accept them if they receive them.  This seems to be a slick way of avoiding the issues and leaving it up to the plan sponsor and payroll to figure out what to do.

Thanks for the information!

On 7/20/2023 at 10:13 AM, Paul I said:

The concept of Roth-only catch-up contributions for High Paid participants is a pure revenue gimmick that is inconsistent with the original concepts of a catch-contribution, a Roth deferral and treatment of participants with higher incomes.

The original of a catch-up contribution is to allow participants age 50 or older to make up for lost opportunities to defer earlier in their careers.  Think child care, college expenses, and big mortgages.  Forcing the catch-up contribution to be Roth for a participant forces the participant to spend more out of their current paycheck.  A $500 pre-tax salary deferral reduces current net pay by $500 and increases current net pay by the income tax savings.  A $500 Roth deferral reduces current net pay by $500 but there is no current tax savings.  It costs a participant more out-of-pocket using Roth while trying to make up for earlier lost opportunities. 

The longer a Roth contribution is in the plan, the greater the value of the tax break at retirement, so waiting to age 50 to start Roth is a less valuable tax strategy than (if the participant can afford to) making Roth deferrals at younger ages.

Setting the High Paid threshold at $145,000 versus using the HCE threshold was acknowledged to be a pure revenue-driven decision.  This provision did not even wink at nondiscrimination as a consideration.  The end result is a whole new layer of compliance that needs to be monitored every year , and this new layer of compliance interacts with existing nondiscrimination compliance.  Think who is or is not High Paid versus HCE, or treating ADP refunds as Roth catch-up for HCE but not High Paid NHCEs.

Further, the High Paid threshold will impact a subset of the NHCEs.  A common scenario is where the children finally are financially off the parents budget and both parents now are working and trying to save more for retirement.  This provision works against them because combined household income makes them High Paid.

Since this is a revenue gimmick, it almost certainly will not go away and its future is destined to see the High Paid threshold be adjusted lower and lower (at least relative to the HCE threshold).

SECURE 2.0 made major changes, and as is often said of major changes in tax laws, it is a

"[pick your profession - accountant, actuary, attorney, consultant, TPA]'s Full Employment Act"

Paul I, I disagree with the following statement because the High Paid threshold (145,000) applies to the FICA wages of the individual participant, not the combined household income:

"Further, the High Paid threshold will impact a subset of the NHCEs.  A common scenario is where the children finally are financially off the parents budget and both parents now are working and trying to save more for retirement.  This provision works against them because combined household income makes them High Paid."