The Rosenbaum Law Firm P.C. Blog

The Internal Revenue Service (“IRS”) issued proposed regulations regarding the provisions of the SECURE 2.0 Act of 2022 (“SECURE 2.0”) that relate to catch-up contributions.

The proposed regulations are for the requirement imposed by SECURE 2.0 that catch-up contributions for highly compensated employees in Section 401(k), 403(b), and governmental 457(b) plans be designated as Roth contributions (the “mandatory Roth catch-up” provision).

The Roth catch-up requirement was originally scheduled to become effective for taxable years beginning after December 31, 2023, but it was delayed until taxable years beginning after December 31, 2025.

The regulations will permit a 401(k) or 403(b) plan to provide that a participant who is subject to the mandatory Roth catch-up requirement is deemed to have irrevocably designated any catch-up contributions as designated Roth contributions. A plan could provide for such a deemed election regardless of whether it requires separate catch-up contribution elections or utilizes a spillover design. However, a plan that provides for such a deemed election must provide the participant with an opportunity to make a new election that is different from the deemed election.

The regulations hold that an individual who did not have any FICA wages from the employer sponsoring the plan for the preceding calendar year would not be subject to the mandatory Roth catch-up requirement under the plan in the current year.

The FICA wage threshold would not be prorated for an individual’s year of hire. So that means that a participant who worked for the employer sponsoring the plan for only part of the preceding year would be subject to the mandatory Roth catch-up requirement under the plan in the current year only if the participant had wages exceeding the full FICA wage threshold from the employer for the preceding calendar year.

The regulations also include two self-correction programs that a plan could use to correct a failure of the mandatory Roth catch-up provision. A plan could provide for either correction method but must use the same correction method for all participants with deferrals over the same applicable limit in a plan year. To use these correction methods, a plan must have practices and procedures in place that are designed to result in compliance with the mandatory Roth catch-up provision. As part of such practices and procedures, a plan must provide for a deemed Roth catch-up election for participants who are subject to the mandatory Roth catch-up provision. Plans would not be permitted to avoid mistakes by categorically requiring that all catch-up contributions be made as designated Roth contributions.

Where a participant’s Form W-2 for a year has not yet been filed or furnished to the participant, a plan is allowed to correct a participant’s pre-tax catch-up contribution that was required to be a designated Roth contribution by transferring the deferral (adjusted for allocable gain or loss) from the participant’s pre-tax account to the participant’s designated Roth account and reporting the contribution (not adjusted for allocable gain or loss) as a designated Roth contribution on the participant’s Form W-2 for the year of the deferral. The contribution would be includible in the participant’s gross income for the year of the deferral.

The other correction method is allowing the plan to correct a participant’s pre-tax catch-up contribution that was required to be a designated Roth contribution through an in-plan Roth rollover. Under this method, a plan would directly roll the deferral (adjusted for allocable gain

or loss) from the participant’s pre-tax account to the participant’s designated Roth account and report the amount of the in-plan Roth rollover on Form 1099-R for the year of the rollover. The contribution (adjusted for allocable gain or loss) would be included in the participant’s gross income for the year of the rollover.

Mariner announced the acquisition of Cardinal Investment Advisors.

Mariner’s advisory assets will grow to $550 billion in the first quarter of 2025.

With offices in Chicago and St. Louis, Cardinal provides investment consulting services to insurance companies, as well as corporate retirement plans, healthcare systems, foundations, and endowments.

The agreement was signed on Jan. 3, 2025. The Mariner and Cardinal integration is expected to be completed by the end of March.

Starting in 2026, Highly Compensated Employees will have to make their Catch Up Contributions as after tax Roth deferrals. The Internal Revenue Service issued regulations to that effect, after the SECURE 2.0’s required implantation date of 2024.

With a new administration and tax legislation a certain topic that a Republican-led Congress will tackle, one question is whether the change will go into effect.

There are good third-party administrators (TPAs) and bad ones. No matter how good your TPA is, they’re not a mind reader. So when it comes to providing information to your TPA, you need to level with them. If you don’t provide the necessary information about the census, ownership, ownership in other entities, and other qualified plans you maintain, your TPA can’t do its job credibly.

I’ve seen too many TPAs discover errors, just because the plan sponsor didn’t provide the necessary information. Corrective contributions might be owed if you did the employee census incorrectly or if you didn’t provide all the companies you own. There might be an issue if you had a SIMPLE plan and didn’t let anyone know.

The easiest errors to avoid are the ones you can avoid by providing the information your TPA asks and by volunteering information that you think they should know.

As a plan fiduciary, I still can’t believe it. A Third Party Administrator (TPA) we terminated was trying to hold us up for valuations and a Form 5500 we paid for, as part of, annual administration. It was $80,000.

We were staying with the same custodian and the old TPA thought we would blink and pay the ransom. We didn’t and had the successor TPA do the work. It’s been 4 years now, and I still don’t know what the Department of Labor did to this TPA, as part of my complaint.

If you’re owed money, there is always an incentive not to do the work they need. You can fail to provide the valuation or Form 5500 that they need to squeeze what they owe you, but they can certainly go somewhere including the new TPA to do the work and you will be out of luck.

Leverage isn’t what it used to be.

Friday, I was supposed to attend the New York Comic Con for a special session since I had a wholesale account with the leading comic book distributor. I’m sure the breakfast would have had some free giveaways and I was looking forward to it.

Thursday, I got a call from the Managing Attorney that I had to show up at the Garden City office for a meeting. My crime: I sent an email to a former client that I worked with at the Third Party Administrator (TPA) I worked at. The TPA sent the e-mail in a complaint to the Firm I was working at. Like emails and maybe going to the bathroom, I needed permission.

When I walked into the Garden City office, didn’t know if I was getting fired or not. The managing attorney was a little strained as one of the partners to the firm had their son become New York Governor, which raised questions over the government union clients we handled. Week and strained, the Managing Attorney treated this e-mail bigger than it was. I survived that day and heard enough dumb lines from her, that will last me a lifetime. As Henry Hill said in GoodFellas, there are times when you have to take a beating.

So when I hear employees losing their jobs because of filmed meltdowns and inappropriate behaviors, I have no sympathy because people in life have been fired for a lot less and a part of me thinks I still could have been clipped that day, almost 17 years ago. The guy acting like a jerk at an Eagles game and he’s identified as working for your firm, he has to go. It’s bad enough to have workers do terrible things at work, it’s far worse if your company’s name is brought up when an employee does something really stupid off the job.

I’m sorry, I just have no sympathy because I was trying to help my firm, and I still caught grief for it.

Most plan screwups happen when either the plan provider doesn’t ask and/or the plan sponsor doesn’t volunteer. It either involves another plan or another affiliated or similarly owned company. As a plan provider, you could ask and the plan sponsor may not tell. If you don’t ask, the mistake is on you. If you did ask, the plan sponsor will still blame you.

That’s why when it comes down to them revealing ownership and prior plan, some language on the form (whether online or not), should have an affirmation from the client that the information is complete and accurate. People, including plan sponsors, don’t like to admit when they’re wrong. So CYA and have them affirm everything is accurate, so the blame isn’t assigned to you.

When it comes to health and fitness, you constantly hear studies about what foods fight or cause cancer. Of course, those studies are then debunked. I remember how oat bran was cited to cut down on cholesterol and how margarine was better than butter. Plus I have heard how coffee can prolong life or kill you. I joked that one study will suggest that constantly eating broccoli will cause cancer too.

I blogged once about how the paranoia in me figures that a plan provider that quickly cuts down their fee might have been overcharging the client, to begin with. People tend to think I have a bias against plan providers such as third-party administration (TPA) firms and I certainly don’t because I see the overwhelming value of a good TPA.

With fee disclosure regulations around for 13 years and constant news articles about 401(k) fees, I think the fascination and concentration on fees could be detrimental if that is the major or sole criteria in selection plan providers.

401(k) plan sponsors, as plan fiduciaries have important responsibilities. These responsibilities include: acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them; carrying out their duties prudently; following the plan documents (unless inconsistent with ERISA); diversifying plan investments, and paying only reasonable plan expenses.

While paying unreasonable plan expenses is a breach of fiduciary duty, picking providers solely or mainly because they are low in fees can also breach a fiduciary duty. Retirement plan sponsors also have a duty of prudence as one of their fiduciary duties. Prudence is about the process of making fiduciary decisions. Prudence requires the plan fiduciaries to document decisions and the basis for those decisions. So in hiring any plan provider, a fiduciary should survey several potential providers. By doing so, a fiduciary can document the process and make a meaningful comparison and selection.

Governmental contracts are typically decided by the lowest bidder. Sometimes it works, but lots of times it doesn’t. The same thing goes with selecting plan providers. There are many low-cost providers out there and some do a very good job and some do not. Some low-cost TPAs may be good if there is a limited amount of work on a 401(k) plan that has a safe harbor design and terrible if the plan requires a discrimination test.

Paying only reasonable expenses is not the same as paying low expenses. Plan provider expenses are less about cost and more about value. A financial advisor charging 15 basis points providing no help in the fiduciary process such as developing an investment policy statement, reviewing investment options, and educating participants in a participant-directed 401(k) plan is less reasonable than paying another advisor 50 basis points to serve as an ERISA §3(38) fiduciary. Why? The advisor charging 15 basis points is increasing the plan sponsor’s liability as a fiduciary because they are doing nothing while the ERISA §3(38) fiduciary is assuming almost all of that liability. Reasonableness is not about cost, it’s about the value of the services provided. A TPA that can help develop a plan design that maximizes contribution for highly compensated employees through a safe harbor/new comparability or a cash balance design is a better value than a TPA who only knows a 401(k) plan with comp-to-comp allocation.

Plan sponsors need to focus on the competency of plan providers, the services they offer, and the value they provide. Concentrating just on how much a provider charges may cost more in the long run if that provider provides incompetent services. I have seen too many plan sponsors forced into the Internal Revenue Service correction programs to fix the errors of plan providers that were picked solely on cost.

Retirement plans with more than 100 participants with account balances require a CPA audit for their Form 5500. However, small plans with less than 100 participants may sometimes require an audit. This often happens when more than 5% of the Plan’s assets are invested in what is called non-qualified assets and a fidelity bond wasn’t purchased in the amount of the non-qualified assets.

For many years, this client held a partnership interest in a privately held real estate partnership that exceeded 5% of assets and was considered non-qualified according to the Department of Labor’s guidance. The previous third-party administration firm (TPA) never raised the issue of the 95% rule, even though it’s been around for years. Of course, this issue only pops up after they make the transition to a new TPA. The new TPA tells the client they need an audit for $10,000 and the audit should have been done for years.

If this client never changed TPAs, would they have ever noticed this error? Of course not, because the lousy TPAs out there have no checks and balances to ensure proper administration. The good TPAs have a system of checks and balances where work is reviewed, checked, and checked again.

I hate to shill, but I stress the need for an independent ERISA attorney who can discover these errors. A review of Form 5500 and a plan asset schedule would have easily uncovered this. As stated before, my Retirement Plan Tune-Up is a legal review that looks at the plan documents, administration, testing, Form 5500, and the investment policy statement for a flat fee of $750.

We always tell plan sponsors to keep ERISA records for 7 years. In this day and age of scanning and PDFs, should mean you don’t need to throw anything out if it’s saved online. The reason I hate for plan sponsors to throw anything out is because some former participant who terminated 25 years ago, has something from the Social Security Administration that they have a benefit for them. I have never had a situation where that notice was accurate and that a former employee had money there.

Hopefully, the Department of Labor’s new lost and found database will have accurate information to show former employees of actual benefits, instead of a statement of benefits they cashed out of when they left.