Blog
November 10, 2025
Master Roth Catch Up Practices & Procedures
Roth Catch-up Contributions Practices & Procedures
For The
Name of Plan (the “Plan”)
Rule Effective January 1, 2026
The Plan provides for both pre-tax and Roth 401(k) deferral contributions. Additionally, the Plan permits Plan participants who are age 50 or older during the calendar year (“catch-up eligible” participants) to make catch-up contributions, as described in Section 414(v) of the Internal Revenue Code (the “Code”).
These practices and procedures are prepared in good faith based on the Treasury Regulations issued by the Internal Revenue Service (“IRS”). These practices and procedures will be amended, as necessary.
Effective January 1, 2026, Code Section 414(v)(7) requires that Plan participants classified as Highly Paid Individuals (“HPIs”) may only make catch-up contributions as Roth 401(k) deferrals. An HPI is defined as a participant who earns more than a threshold amount in FICA compensation paid by the Plan Sponsor or a participating employer in the prior calendar year. The relevant thresholds for FICA compensation are as follows:
| 2025 | $145,000 |
| 2026 | $ |
| 2027 | $ |
For purposes of applying this limit, there are different ways for the FICA compensation to be determined. The general rule considers compensation only from a specific employer in determining whether the deferrals from compensation paid by such employer need to be treated as Roth amounts. However, there are other methods that may be elected. As an option, a plan may provide that the Employer must aggregate the payroll paid to each employee from all commonly owned employers that are using the same payroll provider or from all members of a controlled/affiliated service group or any disregarded entities.
Example: Keith is an employee of both ABC and DEF companies, both of which are controlled group members covered by the XYZ 401(k) Plan, sponsored by XYZ, which is also a controlled group member. The XYZ Plan applies the “general rule” for compensation purposes. Therefore, the XYZ Plan looks at the FICA compensation that Keith earned from ABC in the prior year to determine if Keith is an HPI in relation to the deferrals made from his ABC payroll. If Keith earned more than $145,000 in 2025 as an employee of ABC, he will be an HPI in relation to the deferrals taken from his ABC payroll. The Plan then examines Keith’s FICA compensation earned from DEF. If Keith earns less than $145,000 as an employee of DEF, he is not an HPI in relation to deferrals paid from his DEF payroll.
Example: Les is an employee of both ABC and DEF companies, both of which are controlled group members covered by the XYZ 401(k) Plan, sponsored by XYZ, also a controlled group member. To simplify administration, XYZ elects in its Plan document to aggregate payroll from all members of the controlled group, totaling all FICA compensation amounts paid by ABC and DEF as compensation when applying the $145,000 HPI compensation limit. If Les’s FICA compensation for the two entities combined is greater than $145,000 in 2025, then Les will be treated as an HPI in 2026 in relation to the salary deferrals made from his compensation from both companies.
Additionally, if the Employer has acquired another company in an asset purchase, it may elect to aggregate the FICA compensation earned from both the Seller’s company and the Employer for purposes of determining the employee’s HPI status.
Example: Mary originally works for Bo Peep, Inc. Little Boy Blue Corp. purchases Bo Peep, Inc. in July 2026. After the purchase, Little Boy Blue moves Mary, and all other employees, onto its payroll. In 2027, Little Boy Blue may elect to look at compensation earned from both Bo Peep and Little Boy Blue to determine Mary’s HPI status in the Little Boy Blue Plan.
A catch-up contribution occurs when a catch-up eligible participant has elected to have elective deferrals made to the Plan on their behalf in excess of a limitation in the Plan or in the Code. These limitations include the following:
(a) The limitation on elective deferrals by a participant in a calendar year to any qualified retirement plan (including 403(b) plans and 457(b) plans) or combination of qualified retirement plans in excess of the limit under Code Section 402(g) (which amounts increase periodically for cost-of-living). The Code Section 402(g) limitations for the relevant years are:
| 2025 | $ 23,500 |
| 2026 | $ |
| 2027 | $ |
(b) The limitation on annual additions allocated to the account of a participant in a qualified retirement plan under Code section 415(c). This limitation applies to employer contributions, elective deferrals, employee after-tax contributions, and forfeitures allocated to the participant’s account in any individual defined contribution plan or combination of defined contribution plans sponsored by a given employer or group of related employers. The Code Section 415 limitations for the relevant years are:
| 2025 | $ 70,000 |
| 2026 | $ |
| 2027 | $ |
(c) The limitation on elective deferrals by a highly compensated employee caused by a failure of the average deferral percentage test of Code Section 401(k)(2) and the related correction of such failure; and
(d) A limitation on elective deferrals provided under the Plan (e.g., a limitation on the level of deferrals permitted by HCEs in anticipation of the probability that the ADP test will be failed if such a limit is not imposed).
Initial Election
Plan participants may elect, at the beginning of the year or at any time permitted under the Plan, to make deferrals on a pre-tax or Roth basis, in whole or in a combination of both types.
Deemed Election
The Plan Administrator has instituted a procedure consistent with the proposed Treasury Regulations in relation to Code Section 414(v)(7) under which an HPI is deemed to have elected to have any pre-tax elective deferral in excess of one of the above limits automatically reclassified as Roth to the extent that such elective deferrals are required to be made on a Roth basis. The participant will be advised in a notice either, a separate annual notice, the SPD for the Plan or the deferral election form that they may elect instead to not have such deemed election apply, in which case the amount that would otherwise constitute a catch-up contribution will be distributed to the participant as an excess deferral.
If a participant ceases to be subject to the requirement to have catch-up contributions made as Roth, the “deemed” election will no longer apply, unless the participant has made the Roth election affirmatively.
Any Roth Contribution May be Considered to be a Catch-up Contribution
If an HPI participant has elected to make both Roth deferrals and pre-tax deferrals and some or all of the deferrals for the year are required to be made as Roth contributions, the Roth deferrals already made by the HPI for the year may be used to fulfill that requirement, to the extent possible.
Example: Suppose that Patty, a catch-up eligible HPI, elects in 2026 to contribute $600 pre-tax and $600 Roth semi-monthly (total of $28,800 for the year). Suppose further that the 2026 Section 402(g) limit is $23,500. Because Patty’s total deferrals exceed the 402(g) limit by $5,300, $5,300 constitutes a catch-up contribution for 2026 and such amount must be a Roth deferral. Patty has already contributed $14,400 in 2026 as a Roth deferral. As permitted by the relevant Treasury regulations, $5,300 of the already-contributed Roth would be considered to be the catch-up contribution, permitting the $14,400 of pre-tax amounts contributed during the year to remain pre-tax.
Reclassification of Pre-Tax Amounts
It is possible that the Employer will determine that someone is an HPI for a given year after catch-up contributions have already been deposited to the Plan on a pre-tax basis. Below are methods to convert and correct pre-tax catch-up contributions to Roth for an HPI. The Employer must apply the same correction method for similarly situated participants. For this purpose, “similarly situated participants” are those participants whom the Employer discovers are HPIs due to the same reason and at the same time. If a participant is an HPI but the Employer discovers this later than it found out other employees were HPIs, the newly discovered participant is not “similarly situated” to the earlier discovered HPIs, and a different correction method may be used.
Also, the Employer may not consider investment returns earned by the participant when determining which correction method is applicable.
1. Excess HPI Pre-Tax Deferrals Identified at Time of Contribution
If, prior to the time that an affected deferral is to be removed from a HPI’s paycheck and deposited to the Plan, the Plan Administrator has identified the participant as a catch-up eligible HPI and is aware that the amount to be contributed on behalf of the HPI is in excess of one of the applicable limits, the Plan Administrator will direct the Payroll Administrator to stop the pre-tax deferrals for the HPI and classify subsequent deferrals as Roth until the catch-up contribution limit is reached.
2. Later-Discovered 402(g) Limit Excesses: Form W-2 Conversion Option
If the Plan Administrator identifies a Plan participant as a catch-up eligible HPI or becomes aware that a pre-tax deferral for such HPI is in excess of a deferral limit and must be reclassified from pre-tax to Roth after such amount has been contributed to the Plan, but before the Form W-2 is issued, the Plan Administrator may reflect the catch-up contribution amount as Roth on the Form W-2, box 12. The Plan Administrator must also advise the Plan’s recordkeeper to move such amount (and earnings on such amount) from the HPI’s pre-tax deferral account to the Roth deferral account on or before the deadline discussed below.
Example: Ray contributed $31,000 in pre-tax contributions during 2026. In early January of 2027, Ray is identified as a catch-up eligible HPI. Ray’s deferrals exceeded the 402(g) limit of $23 500, and the excess amount is a catch-up contribution. The Plan Administrator directs Ray’s employer to issue the Form W-2 on a timely basis, reflecting in Box 12 that pre-tax elective deferrals of $23,500 were made (Code D), and that the balance of the deferrals, $7,500, were made as Roth catch-up contributions (Code AA). Earnings on the catch-up contributions earned during the plan year are not included in the amount reflected on Form W-2, but are moved to the Roth account, along with the Roth catch-up amount, by the applicable deadline discussed below.
3. Later-Discovered 402(g) Limit Excesses: In-Plan Roth Conversion
If the Plan Administrator does not identify a Plan participant as a catch-up eligible HPI or that a pre-tax deferral for such HPI is in excess of a deferral limit and must be reclassified from pre-tax to Roth until after the Form W-2 has been issued, the Plan Administrator will coordinate with the recordkeeper to reclassify the relevant deferral amount and earnings thereon as Roth and move such amounts to the Roth account. The Plan Administrator will issue a Form 1099R to the HPI for the year in which the reclassification and transfer occur, reflecting the total amount (catch-up contributions and earnings) as taxable income for such year.
Example: Sam, a catch-up eligible HPI, contributed $33,500 in 2026 on a pre-tax basis. In early March 2027, during the nondiscrimination testing process, it is determined that $5,000 of the pre-tax deferral is an excess contribution and must be reclassified as a catch-up contribution to pass the ADP test for 2026. The Plan Administrator will coordinate with the recordkeeper to reclassify the excess contribution and the earnings thereon as a Roth catch-up contribution and to transfer such amounts to the Roth account. The Plan Administrator will issue a Form 1099R for the year in which the reclassification and transfer occur to Sam in January 2028, reflecting such amounts as taxable income for the 2027 tax year.
Timing for Correction and Reclassification
The Plan Administrator shall direct the recordkeeper to reclassify amounts contributed as pre-tax deferrals to Roth as part of the above procedures on or before the last day of the plan year following the plan year in which the misclassification of catch-up contributions occurred. This correction permits the plan to retain its qualified status. However, there are other tax or other ramifications of corrections that take place after the following earlier deadlines:
-
In relation to 402(g) excess deferrals: If corrected after April 15 of the calendar year following the year in which the excess arose, correction must be treated as a late correction subject to the same rules as any other late 402(g) excess. This means that the amount of the 402(g) excess will be considered to be after-tax (and, therefore, not tax deferred) in the year of the deferral. The excess is taxed a second time when it is distributed.
-
In relation to ADP testing excess contributions: If the correction isn’t completed by March 15 of the calendar year following the year of the excess (or June 30, in the case of a plan that has an eligible automatic contribution arrangement that qualifies for the extended deadline for refunds of excess contributions), the employer will be subject to an excise tax equal to 10% of the excess, just as it would under any other ADP testing corrective distribution not completed by March 15 (or June 30).
-
No reclassification of the pre-tax catch-up contribution to Roth is required If:
-
the amount subject to correction is $250 or less; or
-
A participant is identified as an HPI only upon the issuance of an amended Form W-2 after the last day of the taxable year following the year in which the catch-up contribution arose.
-
Effect of Late Correction
Except to the extent that an alternate correction is available under EPCRS (or other applicable Treasury or IRS guidance), if the above deadlines are not met, any excess shall be refunded or distributed to the HPI in the same manner as would apply if the HPI was not catch-up eligible.