Secure 2.0

Regarding  catchup contributions starting 1/1/2024 going to the Roth source for certain high earners, is that only for W2 employees? What about Schedule C/Schedule K owners? And how would that work for those people whose money is in pooled accounts and not separated by source, other than by a TPA in their system?  TYIA. 

It's for everyone who had earnings over the limit in the prior year.

Presumably the TPA is tracking the sources otherwise how are they doing ROTH now?

The provision in the act specifies that a High Paid person is an individual whose 3121(a) wages in the prior year were over $145,000.  That specific reference does not describe compensation earned by self-employed individuals such as sole proprietors and partners. 

Since the statute specified 3121(a) wages, it is not clear if the IRS has a path to extend the definition of High Paid to self-employed individuals without literally without an act of Congress.

It seems likely that the situation Paul points out was not intended by Congress. Nevertheless, the text of the law as it stands today is reasonably understood to say that individuals with earned income, and therefore no sec. 3121(a) wages (because they pay into Social Security and Medicare through self-employment taxes instead) would not be subject to the Roth catch-up rule.

An employer/administrator might further interpret Internal Revenue Code § 414(v)(7) by observing that the statute assumes a participant’s wages for the preceding year is knowable. A self-employed individual’s self-employment income for a calendar year might not be determined until the business organization has completed its tax returns and related tax-information reports for that year, perhaps by September or October of the next year. If there are different possible interpretations of § 414(v)(7) (and I don’t admit that idea), a sensible interpreter might prefer an interpretation that is reasonable to administer.

4 hours ago, Lou S. said:

It's for everyone who had earnings over the limit in the prior year.

Presumably the TPA is tracking the sources otherwise how are they doing ROTH now?

Plan does not allow for Roth currently. 

If the plan’s sponsor/administrator, after considering its lawyer’s advice, decides that § 414(v)(7)’s constraint does not apply to a self-employed individual, is there any employee (not a deemed employee) who in 2024 will be at least 50 and will have had $145,000 in 2023 wages?

17 hours ago, ratherbereading said:

Plan does not allow for Roth currently. 

Well sounds like some decisions need to be made before 1/1/24 with respect to whether Plan will allow ROTH or eliminate Catch-up. And if they allow ROTH, confirm the TPA can record keep it or start a search for a new TPA.

While it’s not something I suggest (and I’m asking much more generally, rather than about ratherbereading’s situation):

Would it be feasible for a plan to omit Roth elective deferrals and provide that a § 414(v) catch-up is available only to those participants not constrained by § 414(v)(7)?

Would such a provision sufficiently avoid discriminating in favor of § 414(q) highly-compensated employees?

 414(v)(4)(A) provides a special rule for a plan to satisfy the requirements of 401(a)(4) with respect to the availability of catch-up contributions. It states:

Quote

An applicable employer plan shall be treated as failing to meet the nondiscrimination requirements under section 401(a)(4) with respect to benefits, rights, and features unless the plan allows all eligible participants to make the same election with respect to the additional elective deferrals under this subsection.

This paragraph says "all eligible participants" - not just all eligible NHCEs - so I don't think you can eliminate the availability of catch-ups for just a portion of the employees, even just HCEs, without violating 401(a)(4).

That ends that query!

On the point about whether § 414(v)(7) restrains only employees (and not self-employed individuals), some law, accounting, investment-adviser, and other firms with working owners might have a perhaps awkward situation that nonpartners are restrained in choosing the tax treatment of catch-up deferrals while partners might be unconstrained in their choice of tax treatment.