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Short version - if a participant gets any employer contribution (profit sharing, NEC, match, QNEC, QMAC...) their compensation is included in calculating the deductible limit.

They must be permitted to continue in the plan under the "once-in-always-in" rule of Notice 2018-95.

Could it be the plan simply didn't want to give participants the option to delay the first distribution so they don't have to process 2 in one year? Though I'm not sure how you get the first one processed by January 1 if say a non 5% owner terminates on December 31st.

The primary responsibility likely will be driven by circumstances. For example, if the plan procedure is to allow a catch-up eligible HPE to make an election to defer x% and to make an election to defer up to the deferral limit or the deferral limit plus the catch-up, then this should be fairly straightforward for payroll to administer. On other hand, if a catch-up eligible HPE elects to defer only up to the deferral limit and in the following year the TPA determines the plan fails the ADP test requiring a refund to the HPE, and the HPE wants the amount to stay in the plan as catch-up, then it is the TPA that will have the information needed to treat the catch-up as Roth. Payroll will not know about this until well afterwards. By then, the HPE's W-2 was prepared and filed with the IRS. Further, the HPE may no longer be an employee when the amount of the catch-up/Roth calculation is known. How will this be reported? I'm sure there are other circumstances that could be complications. If the payroll procedure for an HPE is to keep an election for elective deferrals separate from an election for catch-up contributions, then it would seem logical that payroll would treat the catch-up amounts as Roth. If the HPE terminates before reaching a plan limit triggering the availability of catch-up contributions, then the question would need to be addressed if payroll's treatment was consistent with the plan provisions. Can't wait for some IRS guidance to be released. One third of this year has passed and the clock is ticking!

I tend to agree that this would be a function of payroll, especially given that the $145k prior earnings limit only applies if that employee worked for that company in the prior year. The TPA/RK may be able to offer assistance but from a practical standpoint think there will need to be payroll controls and policies in place for this.

You also must make up 100% of any missed match if the plan provides a matching contributions. I wrote a blog on this if you find it helpful: https://www.newfront.com/blog/401k-ology-the-missed-deferral-opportunity

The 45 day notice period would begin on the date of the paycheck/pay date as that is when the 1st correct deferral begins.

Here are sample notices used to notify participants about a payroll issue. Note that there are 2 notices - one for continuing actives and one for terminated employees. The client was able to take advantage of the brief exclusion rule for the actives. Sample notices - payroll issue.docx

And, while not trying to be sexist....we need a MAN DeLorean.

Right - do right by the plan first, since that's your client. If the plan does what IT is supposed to, the rest is on the participant.

I would treat it just like failed ADP test after total distribution. (See instruction to Form 1099-R the procedure is in there) I believe the procedure is you amend the 2022 1099-R and issue 2 1099-Rs, one for the excess contribution and the other for the rollover. The excess contribution is not eligible for rollover so the participant needs to be instructed to remove the excess contribution (along with earnings/loss). The IRA should have forms to remove the excess IRA contribution. It does not need to be returned to the Plan.

If you are a member of an organization with a code of conduct (e.g., ASPPA) and/or subject to Circular 230, I would consult those resources concerning professional and legal obligations.

I'd resign regardless of whether they ultimately decide to correct or not. Life is too short to deal with this type of client. We would certainly seek counsel re our obligations to report or not report, etc. Rock - TPA - Hard Place.