Prototype Plan - Catchup Contributions allowed but no Roth

If a plan currently allows catch up contributions but does not allow roth contributions, does it HAVE TO BE amended BY 12/31/23 to either remove catchup or add roth. 

Only if the plan covers anyone born in 1974 or earlier with sec. 3121(a) wages of more than $145,000 in 2023.

Certainly best case scenario would be to amend the plan prior to the start of 2024, but does the amendment HAVE TO BE adopted by 12/31/2023.  Or could you put Roth in place and adopt an amendment by 12/31/2024?  I seem to remember from a webinar at the beginning of the year in which Derrin Watson quietly conjectured as to if Roth was only being added to conform to the requirements of SECURE 2.0, if the plan could adopt an amendment as late as 12/31/2025.  Again, not that any of that would be the best course of action, but I'm just thinking ahead to all of the potential screw ups in 2024 and potential correction options.

Imagine a service provider with almost all its clients using IRS-preapproved documents.

Imagine the service provider thinks it is safer for its clients (and efficient for the service provider) to do a § 414(v)(7) plan amendment before 2023 ends.

Imagine the amendment takes the form of checking the adoption agreement’s Roth-deferral box, or unchecking the catchup box.

I know any processing is work. But of plan-amendment tasks, is this a somewhat simpler one?

(I ask only about the document task, not the work of implementing whichever provision the plan’s sponsor chooses.)

Is this a change for which a service provider may set a default provision? For example:

If you don’t respond to this request, you instruct us to perform our services assuming your plan does not allow catchup deferrals after 2023.

Gilmore - my concern with a 12/31/2024 amendment would be the effective availability of Roth contributions, within the meaning of the 401(a)(4) regs. HCEs would have their catch-ups automatically reclassified as Roth in order to comply with the new rule. However most non-HCEs would not have any opportunity to make a Roth election if the amendment were adopted very late in the year.

Putting the Roth option in the plan before the beginning of the year also allows the disclosures for the 2024 plan year to accurately reflect the options that will be available, instead of requiring later amendments. This also goes to Peter's question about the complexity of this amendment from a document provider's perspective. Besides merely checking a box, safe harbor notices and 401(k) election forms (maybe other notices as well) will need to be updated to reflect whichever options are chosen.

Communicating the availability of a plan provision might be an element of showing the provision was effectively available.

I imagine that with many service providers’ systems either changed box in the adoption agreement would generate at least a summary of material modifications, and should change any affected text in system-assembled notices and forms.

Is that what happens practically in the real world?

I'm a little puzzled by the date by which a discretionary amendment must be adopted, and the real life effects of this fun stuff.

First, my understanding is that adding Roth is a discretionary amendment, and as such, should be eligible for amendment by the end of the year in which it is operationally implemented - so in this case, by 12/31/2004. CB, why is it that the NHCE wouldn't have the ability to make a Roth election, if it is operationally implemented and communicated as of 1/1/2024? I'm missing some crucial piece here. Thanks! (P.S. - it would certainly be nice if the IRS would opine that you could do this operationally and make it part of the SECURE/2.0 amendment by 12/31/25...)

Excerpt from RP 2016-37:

04 Except as otherwise provided in sections 15.05 and 15.06 of this revenue procedure, the deadline for the timely adoption of an amendment for any pre-approved plan is determined as follows: (1) In the case of an interim amendment, an employer (or a M&P sponsor or VS practitioner, if applicable) is considered to have timely adopted the amendment if the plan amendment is adopted by the end of the remedial amendment period described in § 1.401(b)-1(b)(3) (determined without regard to the extension under section 15.03 of this revenue procedure). See section 2.07 of this revenue procedure. (2) In the case of a discretionary amendment (that is, one that is not an interim amendment described in section 15.02), an employer (or a M&P sponsor or VS practitioner, if applicable) is considered to have adopted the amendment timely if the plan amendment is adopted by the end of the plan year in which the plan amendment is 21 operationally put into effect. See section 8.02(1) of this revenue procedure for examples illustrating this deadline.

This illustrates one of the many awkwardnessses of tax law’s remedial-amendment regime (which ERISA’s title I does not recognize).

In this instance, there might be a tension because a provision, even if not yet stated in what tax law treats as the written plan, nonetheless must be written enough so the plan’s administrator can communicate the provision to participants.

If we know a new or changed provision well enough that we can in plain language explain the provision in communications to participants, why should the sponsor delay the written plan amendment?

Time. It takes longer (perhaps depending upon automation capabilities) to do an amendment/SMM than it does to perhaps have a "canned" paragraph or three that can be used to communicate the change in a less formal manner.

I'm with Belgarath. As long as the Roth option is operationally in effect 1/1/2024 and adequately communicated to all, what grounds would DOL, IRS, or any participant have to complain if it was not actually adopted until the end of year?

I didn’t mean to suggest any plan sponsor need adopt its remedial amendment any sooner than that regime calls for.

Rather, for a plan’s sponsor/administrator that lacks the help of one of us and relies on what a recordkeeper’s systems produce, doing what those systems see as a plan amendment sometimes is a way to push communications about a new or changed provision, if the recordkeeper has integrated other communications, including notices and forms, with its plan-documents system.

I suppose I agree that a plan could be operationally amended to allow Roth starting 1/1 even if the actual paper amendment is not signed until later in the year. However, as a practical matter, I would advise my clients to adopt the Roth amendment before 1/1, mostly to ensure that all of the other things downstream of the amendment are taken care of appropriately. For example, I know of at least one recordkeeper that asks for a copy of the plan amendment when you tell them to add a Roth source. I haven't tried telling them that there is no amendment yet and we intend to amend the plan by the end of the year - I don't know if they would accept that.

I also don't know that Belgarath's "canned paragraph or three" would meet all the applicable disclosure rules. I'm thinking of the safe harbor notice, which has to include a description of the deferral elections available. If you're manually editing the safe harbor notices to include Roth language, then that's great - but if we want to be able to use what's coming out of the document system, then we would need the amendment ahead of time.

Amend your plans by the end of 2025.

https://benefitslink.com/src/irs/n-23-62.pdf

Under to-be-published Notice 2023-62 (which the Bakers and C.B. Zeller flag for us), the Internal Revenue Service makes our queries practically irrelevant.

“[U]ntil taxable years beginning after December 31, 2025, (1) those catch-up contributions [made on behalf of § 414(v)(7)-restricted participants] will be treated as satisfying the requirements of section 414(v)(7)(A), even if the contributions are not designated as Roth contributions, and (2) a plan that does not provide for designated Roth contributions will be treated as satisfying the requirements of section 414(v)(7)(B).”

Further, the IRS practically confirms:

Self-employment income does not count to determine whether a participant is § 414(v)(7)-restricted.

An employer and an administrator may treat a non-Roth election as a Roth election if needed for a catch-up deferral to meet § 414(v)(7).

Some non-aggregation tolerances for a multiemployer or multiple-employer plan about a participant who has more than one participating employer.

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