I am seeking clarification on when deemed Roth should cease to apply.
The final regulations are clear that deemed Roth would cease to apply when a participant is no longer subject to the requirement because their box 3 FICA wages fall below the indexed threshold on either their original or corrected W-2. Is there a requirement to revert a deemed Roth election back to the prior pre-tax election every 1/1 and/or after the Roth catch-up requirement is fulfilled?
Assumptions: $24,000 402(g) limit and $8,000 catch-up limit in 2026, no lower plan limits, calendar year plan
Scenario 1: Plan has separate pre-tax catch-up and Roth catch-up contribution rates that are deducted concurrently with pre-tax and Roth contribution rates. A highly paid individual subject to the Roth catch-up requirement in 2026 has $10k in eligible comp each pay period and is contributing 5% pre-tax, 5% Roth and 5% pre-tax catch-up at the end of 2025 and does not elect to opt out of deemed Roth catch-up by zeroing out their pre-tax catch-up rate.
My interpretation of the final regulations is that a pre-tax catch-up contribution should become available once the participant has contributed their catch-up limit in Roth YTD, i.e. after $8,000 Roth and Roth catch-up has been made in pay period 8.
Q1a: Would the deemed 5% Roth catch-up election automatically cease to apply and revert back to a 5% pre-tax catch-up contribution rate starting pay period 9 without the participant making an affirmative election back to pre-tax or would it only revert if/when the participant makes that election?
Q1b: If the participant is required to make the affirmative election back to pre-tax catch-up, is only making the pre-tax catch-up contribution rate change available after pay period 8 sufficient or do they need to be able to make the election sooner?
Scenario 2: Participants spill over to catch-up. A highly paid individual subject to the Roth catch-up requirement in 2026 has $10k in eligible comp each pay period and is contributing 10% pre-tax and 10% Roth. The plan has elected to look at combined pre-tax and Roth contributions in determining when the deemed Roth applies (opposed to only pre-tax). When the participant hits the 402(g) limit with pre-tax and Roth on pay period 12, their catch-up contribution rate is deemed to be 20% Roth beginning on pay period 13.
Per the paragraph 88 of the final regs commentary, “in order to ease administrative burden for plans, in determining when during the year to implement a deemed Roth election under final regulation § 1.401(k)-1(f)(5)(iii), a plan is not required to take into account elective deferrals made by a participant earlier in the year as designated Roth contributions. Thus, a plan may provide that a deemed Roth election will be implemented with respect to a participant once a participant's total elective deferrals for the year (including any designated Roth contributions) equal the section 401(a)(30), 402(g)(7), or 457(b) limit, as applicable. Further, after implementing the deemed Roth election, the plan would not be required to recharacterize any designated Roth catch-up contributions made pursuant to the deemed election as pre-tax for the purpose of counting any designated Roth contributions made earlier in the year by the participant toward satisfaction of the Roth catch-up requirement. However, since the plan must also provide such a participant an effective opportunity to make a new election that is different than the deemed election, if a participant who is subject to the Roth catch-up requirement makes an affirmative election to make pre-tax catch-up contributions, the plan would be required to take into account any elective deferrals made by the participant earlier in the year as designated Roth contributions when determining the amount of the pre-tax catch-up contributions to be corrected in order to comply with section 414(v)(7) (such that the pre-tax catch-up contributions must be corrected—that is, either distributed from the plan or corrected in accordance with a correction method set forth in final regulation § 1.414(v)-2(c)(2)—only to the extent that a participant's catch-up contributions for the year exceed the participant's designated Roth contributions made over the course of the year).”
Q2a: When is the plan required to let the participant opt out of the deemed Roth catch-up? After pay period 12 when they hit the 402(g) limit? Or earlier such that they would keep their 10% pre-tax and 10% Roth contribution rates until they hit the combined 402(g) and catch-up limits on pay period 16?
Q2b: What is the best way to track a participant’s election to opt out of deemed Roth catch-up in a spillover plan? In a plan with separate catch-up rates it seems clear that zeroing out the catch-up rates would satisfy the effective opportunity to opt out of deemed Roth.
Q2c: Assuming the participant’s 10% pre-tax and 10% Roth contribution rates become a 20% Roth contribution rate effective pay period 13 in 2026, is the plan required to revert the participant’s rates back to 10% pre-tax and 10% Roth beginning 1/1/2027 if the participant is a highly paid individual and subject to the restriction again for 2027?
