Correcting Roth catch-up contribution mistakes
This article is the third in a series and explores correction methods available when catch-up contributions for a participant subject to the Roth catch-up contribution mandate are mistakenly made on a pre-tax basis instead of a Roth basis.
Recall that a catch-up contribution is an elective deferral made by a participant age 50 or older that exceeds a statutory limit, a plan-imposed limit or the actual deferral percentage (ADP) test limit for highly compensated employees.
If participants who are subject to the Roth catch-up requirement make pre-tax elective deferrals that exceed one of these limits, such contributions will not qualify for treatment as catch-up contributions, and the plan will fail to be qualified unless the excess contributions are corrected.
A plan is permitted to correct this type of error by distributing the pre-tax elective deferrals that are not catch-up contributions. The final regulations also provide two additional correction methods that allow pre-tax elective deferrals that exceed an applicable limit to be treated as a Roth contribution.
All three correction methods are discussed below.
In order to use the two correction methods below that treat the excess pre-tax deferrals as designated Roth contributions (rather than distributing them from the plan), a plan must have practices and procedures in place that are intended to ensure that elective deferrals are made in compliance with applicable statutory limits. A plan must also provide for deemed Roth catch-up elections with respect to pre-tax deferrals that exceed the Internal Revenue Code (IRC) section 402(g) limit ($24,500 for 2026) and give participants an effective opportunity to make a different election. (The deemed election and effective opportunity rules will be discussed in an upcoming article.)
For both the W-2 and in-plan Roth rollover correction methods, the five-taxable-year period for determining whether a distribution from a designated Roth account is treated as a qualified distribution begins with the taxable year in which the amount transferred or directly rolled over is includible in the participant’s gross income.
Note that a selected correction method must be applied consistently to all similarly situated participants. For example, a plan may use the Form W-2 method for all participants whose W-2s have not yet been filed and use the in-plan rollover method for those whose W-2s have already been issued.
The deadline to correct a Roth catch-up requirement failure depends on the type of failure. More specifically:
While these lengthy correction periods are helpful, it is important to note that any applicable earlier correction deadline related to other tax consequences continues to apply to the excess deferral. For example, if a pre-tax deferral is an excess catch-up contribution because it exceeds the IRC section 402(g) contribution limit, the deadline to make a correction that would both fix the Roth catch-up contribution failure and also avoid adverse participant tax consequences is earlier: April 15 of the calendar year following the calendar year in which the salary deferral was made.
As a result, any failure to satisfy the Roth catch-up requirement means the plan will also fail to comply with any applicable statutory or plan limit unless (1) the failure is corrected by the shorter deadline that typically applies for correcting an underlying statutory of plan limit failure or (2) one of the limited exceptions to correct Roth catch-ups (described below) applies.
The two limited exceptions to having to correct a Roth catch-up failure are described below:
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.
