Beginning in 2026, participants whose prior-year FICA wages exceeded $150,000 in 2025 (indexed for inflation in later years) must make any catch-up contributions on a Roth basis rather than a pre-tax basis. While many employers have worked closely with payroll providers and recordkeepers to implement the new rules, errors can still occur, and we have started to get these calls from clients regarding what to do next when an error is detected. If you discover that a participant who was subject to the mandatory Roth catch-up requirement instead made catch-up contributions on a pre-tax basis, the good news is that the final regulations provide a correction framework as long as you elected the deemed method. Most employers selected the deemed method for this reason, which means they were supposed to automatically roll a high earner into Roth even if they hadn’t elected Roth, rather than requiring the participant to make a new election.
If you discover an error, your first step should be to determine the amount of the participant's catch-up contributions that were incorrectly treated as pre-tax. Work with your payroll provider and recordkeeper to identify when the participant exceeded the regular elective deferral limit and the amount that should have been designated as Roth. Once the erroneous amount is determined, the correction method generally depends on timing. If you catch the error this year or early next year before the Form W-1 has been filed, the correction is as simple as transferring the amount to the participant's Roth account and correcting the wage reporting on the W-2. If you catch the error after the W-2 has already been filed, the regulations generally contemplate an in-plan Roth rollover and related tax reporting, but to avoid this being an operational error, a 2026 error must be corrected no later than December 31, 2027. Similar correction methods should be applied to similarly situated participants.
As part of the correction process, you should document the cause of the error and evaluate whether additional participants may have been affected. In many cases, the issue stems from payroll coding, a failure to identify high earners based on prior-year FICA wages, or a breakdown in data sharing between payroll and the retirement plan recordkeeper. Fixing the operational issue is just as important as correcting the participant's account because it helps prevent the problem from recurring in future years.
Importantly, not every error requires correction. The final regulations include a de minimis exception under which correction is generally not required if the participant's total erroneous pre-tax catch-up contributions do not exceed $250. While employers may still choose to correct these small-dollar errors, the regulations recognize that the administrative burden may outweigh the benefit where the amount is minimal. Employers should nevertheless maintain records supporting their determination that the error falls within the exception. Similarly, you do not need to correct an error in certain limited circumstances where it is unknown that the participant had wages over that amount until after the allowable correction period.
We recommend checking throughout this first year as individuals may hit the catch-up limit to make sure this is working as planned. Early identification will often simplify the correction and reduce participant confusion. If you discover a mandatory Roth catch-up error, act promptly and coordinate with your payroll provider, recordkeeper, and benefits counsel. If you need assistance, please reach out to any member of our Benefits team.
