To Deem or Not to Deem
This article is the fourth in a series and explores the different administrative approaches that employers can use to comply with the Roth catch-up contribution mandate.
As discussed previously in this series, if a participant is subject to the Roth catch-up requirement, then any catch-up contributions that are made to the plan on behalf of the participant must be designated as Roth contributions. To comply with this requirement administratively, plan sponsors may either require participants subject to the mandate to affirmatively elect to make catch-up contributions on a Roth basis or treat an existing election by the participant to make pre-tax catch-up contributions as an election to make catch-up contributions as Roth contributions, i.e., a “deemed election” approach.
A plan may treat a Roth catch-up participant who previously elected to make pre-tax catch-up contributions as having elected Roth catch-up contributions. This deemed Roth catch-up election is similar in some ways to automatic enrollment in that the participant is subject to a default election but is allowed to make a different election subject to IRS and plan rules.
The final rule provides for two different ways that a plan may provide for when a deemed Roth catch-up election will be implemented:
Under the final regulations, the rules below apply when plans use a deemed election approach.
When a deemed election approach is used, the plan must provide participants with an “effective opportunity” to change the deemed Roth catch-up election. The final rule includes limited details regarding the effective opportunity requirement and generally provides that whether a Roth catch-up participant has an effective opportunity to make a new election is determined based on the facts and circumstances within the meaning of IRS regulations. The lack of guidance has led to questions about how the effective opportunity to make a different election might be satisfied (e.g., when must the opportunity to make a different election be offered and what choices must be made available).
At a minimum, the effective opportunity rule appears to require that participants be allowed to stop making catch-up contributions rather than being forced to switch to Roth. However, when a deemed Roth catch-up election is implemented based on a participant’s total pre-tax and Roth contributions (option 1 above), and a participant makes both pre-tax and Roth contributions before reaching the IRC section 402(g) salary deferral limit, the deemed election could prevent a participant from making all allowable pre-tax contributions to the plan, since the participant’s prior Roth contributions are not treated as Roth catch-up contributions. As a result, to satisfy the effective opportunity requirement when this approach is used, it may be necessary to allow participants to opt out of a deemed Roth catch-up election and continue making pre-tax contributions. However, if a Roth catch-up participant makes excess pre-tax contributions for the year, they must be corrected after year-end using one of the permitted correction methods.
A deemed Roth catch-up election must cease to apply to a participant within a “reasonable period of time” after either (1) a Roth catch-up participant is no longer subject to the Roth catch-up requirement (e.g., following a transfer to another participating employer in the controlled group), or (2) an amended W-2 is issued for the prior year with FICA wages that have been revised below the FICA wage threshold. This is intended to provide administrative time for the change to be implemented without resulting in a Roth catch-up requirement failure. Catch-up contributions that were designated as Roth contributions pursuant to the deemed election before the end of the reasonable period of time do not need to be recharacterized as pre-tax catch-up contributions.
Some plans use separate elections for regular contributions and catch-up contributions (as opposed to the more common “spillover” approach, where a participant makes one contributions election applicable to both regular elective and catch-up contributions). For separate election plans, a plan can deem the catch-up contributions as Roth prior to the participant making contributions that exceed the IRC section 402(g) limit. For example, if a Roth catch-up participant separately elects to make catch-up contributions and regular elective contributions at the start of the year, the plan may provide that these catch-up contributions will be deemed to be made on a Roth basis. This may result in a situation where elective contributions during the year are deemed to be made as Roth contributions (because of the timing for determining catch-up contributions), but it is later determined that the contributions are not actually catch-up contributions. In this situation, the plan is not required to recharacterize as pre-tax any of the participant's elective contributions treated as Roth catch-up contributions pursuant to the deemed Roth election.
A deemed Roth catch-up election, including when it applies, must be specified in the plan document. The deadline for an amendment to provide for a deemed Roth catch-up election is the same deadline that applies to other SECURE 2.0 provisions (generally December 31, 2026). Although the final regulation does not appear to require an amendment when a plan is not adopting the deemed Roth catch-up election approach, to avoid confusion plan sponsors may wish to include a decision to suspend pre-tax catch-up contributions (rather than the deemed Roth catch-up election approach) in the SECURE 2.0 plan amendment.
The deemed Roth catch-up election offers important advantages over an affirmative election approach. First, it allows participants to automatically continue making catch-up contributions when they would otherwise have to stop or make an affirmative new election. And of particular importance as discussed in Part 3 in the series, Correcting Roth catch-up contribution mistakes, it allows the correction of excess pre-tax contributions by converting the pre-tax contribution to Roth instead of having to receive a distribution, which helps participants to save for retirement.
However, there may be challenges to implementing the deemed Roth catch-up election. Monitoring the IRC section 402(g) limit on a pre-tax only basis for Roth catch-up participants is beneficial in that the effective opportunity may be easier to administer. However, most payroll systems only track the IRC section 402(g) limit on a combined pre-tax and Roth basis. So separately tracking the amount of pre-tax contributions may not be available or may only be feasible after making significant payroll programming changes.
The ability to apply a deemed Roth catch-up election based on the total pre-tax and Roth contributions was expected to greatly simplify administration, since this is similar to how catch-up contributions are currently tracked. However, the requirement to provide Roth catch-up participants the opportunity to elect to override the deemed election and continue making pre-tax catch-up contributions introduces significant operational complexity. Current recordkeeping systems generally do not offer the administrative functionality needed to support these elections, making compliance with the effective opportunity requirement difficult.
Like so many other aspects of the Roth catch-up requirement, there is no single best approach for compliance. Instead, a plan’s compliance approach should reflect the capabilities of the recordkeeper and payroll provider. Compliance with the final rule is not required until 2027, which allows a good-faith compliance interpretation of the deemed Roth catch-up election and the effective opportunity requirement for 2026. However, since 2027 will be here soon enough, it is important to carefully evaluate recordkeeper support and payroll capabilities before deciding whether to adopt the deemed Roth catch-up election and selecting the approach for monitoring this election.
If you need any help understanding your decision points or how all your administrative pieces fit together, reach out to a WTW consultant today to discuss your specifics.
