Correcting Failures

The final regulations clarify the correction methods that may be used if participants subject to the Roth catch-up requirement make pre-tax salary deferrals that exceed an applicable limit. The final regulations describe several methods of correction.

• Form W-2 correction method. The excess pre-tax amount, adjusted for earnings, is transferred from the participant’s pre-tax deferral account to the participant’s designated Roth account, and the participant’s Form W-2 includes the transferred pre-tax deferral amount as a designated Roth contribution. This correction method cannot be used if the participant’s Form W-2 has already been filed or furnished to the participant, limiting its usefulness for corrections occurring after January 31; thus, if all or a portion of a participant’s pre-tax deferrals are recharacterized as catch-up contributions to correct an ADP test failure, it will generally be too late to use the Form W-2 correction method.
• In-plan Roth rollover correction method. The plan can directly roll over the excess pre-tax amount, adjusted for earnings, to the Participant’s designated Roth account, and the amount rolled over is reported on a Form 1099-R for the year of the correction. The contribution and earnings would be includible in the participant’s gross income in the year of the rollover. A plan can use this correction method even if the plan does not permit participant in-plan Roth rollover contributions because the rollover is made by the plan administrator to correct an operational failure and not by the participant.
• Distribution method. The plan can distribute the pre-tax catch-up contribution, adjusted for applicable earnings, that was required to be a designated Roth catch-up contribution as an excess contribution.

The advantage of both the Form W-2 correction method and the in-plan rollover correction method is that the incorrect catch-up contributions can remain in the plan. However, these correction methods can only be used if the plan provides for a deemed Roth catch-up election; otherwise, the incorrectly made catch-up contributions would have to be distributed from the plan.

If the amount transferred under the Form W-2 correction method or directly rolled over under the in-plan Roth rollover correction method is the first contribution to a participant’s designated Roth account, the five-taxable-year period begins with the taxable year for which the amount is includible in the participant’s gross income.

The deadline to make correction is the last day of the taxable year following the year for which the catch-up contribution was made. However, if the correction is made after the deadline to correct the type of salary deferral failure that occurred, the consequences of not making a timely correction still apply to the catch-up contributions. The types of failures that may occur generally are:

• If a pre-tax salary deferral is a catch-up contribution because it exceeds the salary deferral contribution limit, the deadline to make a correction is April 15 of the calendar year following the calendar year in which the salary deferral was made.
• If a pre-tax salary deferral is a catch-up contribution because the participant’s annual additions would otherwise exceed the Code section 415 limit, the deadline to make a correction is the deadline under the Code section 415 regulations for allocating amounts for the limitation year for which the salary deferral was made.
• If a pre-tax salary deferral is a catch-up contribution due to an ADP test failure, the deadline to make a correction is the date that is 2-1/2 months (six months for a plan that includes an eligible automatic contribution arrangement) after the close of the plan year for which the excess contribution was made.  This deadline would also apply to correct a pre-tax catch-up contribution that is a catch-up contribution because it exceeds an employer-provided plan limit.

Thus, a plan may have different correction deadlines depending on each participant’s particular situation, but the same correction method is required for similarly situated individuals.

Correction is not required under two circumstances:

• The amount of the pre-tax salary deferrals that should have been designated Roth catch-up contributions does not exceed $250.
• The employee’s FICA wages are determined to exceed the applicable threshold on account of adjustments made after the applicable correction deadline.

Amendment Deadlines

Plan sponsors will need to amend their plan documents to reflect the manner in which the final regulations were implemented. The deadlines to adopt amendments for these changes depends on the plan:

• The amendment deadline is generally December 31, 2026.
• Plans maintained pursuant to one or more collective-bargaining agreements must be amended by December 31, 2028.
• Governmental plans must generally be amended by December 31, 2029.

The final regulations also clarify that an amendment that applies mid-year is not a prohibited change to a safe harbor plan as described in Notice 2016-16.

AUTHORS’ NOTE: This Article addresses issues under the final regulations that will affect a majority of plans. We have not explained every issue under the final regulations which, in many cases, apply to a smaller group of plans. Plan sponsors should seek legal advice regarding their good faith compliance with the new requirements. The Wagner Law Group would be happy to provide guidance on these requirements.

EDITOR’S NOTE: This article is reprinted with permission of The Wagner Law Group.

SEE ALSO:

• New SPARK Guide Helps DC Plans Navigate SECURE 2.0 Roth Catch-Up Rules
• IRS, Treasury Dept. Release Final Regulation for Roth Catch-Up Contributions