Mandatory Roth Catch-Up Correction Method -- Followed by EPCRS Correction?

[Interested Party]

A client asked about the following situation:

* Employee becomes a highly paid participant ("HPP") for 2027 subject to the mandatory Roth catch-up rules.

* Although the plan has adopted a "deemed Roth election" feature, employer never provided notice to the employee that she was an HPP for 2027 and, thus, was required to make catch-up contributions on a Roth basis.

* HPP makes pre-tax deferrals in 2027 up to the 402(g) limit and the statutory catch-up limit.

 

The client asks "what is the required correction?"  My thoughts are as follows:

* The client cannot move the pre-tax catch-up contributions to the HPP's Roth deferral account, because the deemed Roth election feature does not apply (due to the fact that the HPP was not given an opportunity to opt out of the deemed Roth election feature).

* In this case, the pre-tax catch-up deferrals (and earnings) are distributed to the HPP under the mandatory Roth catch-up regulations.

* However, I don't think this is the full correction.  I believe there has been a failure to provide the HPP with an opportunity to elect and make catch-up contributions.  Accordingly, this error must be corrected by the employer making a QNEC as set forth in Rev. Proc. 2021-30, Appendix A, Section .05(2)(g)(4)(a) ("Improperly excluded employees:  catch-up contributions only").

Have I thought this through correctly?  Thanks in advance.

[WCC]

Interesting question, thanks for sharing. I just have thoughts for discussion and no direct answer that I can back up.

The plan document will need to be amended to say contributions will be deemed from pre-tax to Roth. Therefore, if the terms of the document are not followed, then I would assume an operational failure occurs. In this case, the employee was not told pre-tax elections would be deemed. So my thoughts are either (1) the terms of the document are followed meaning deeming happens now and the participant agrees to the deeming since they not told timely or (2) the plan administrator returns their ineligible catch-up if the employee opts out of deeming now. 

There is no missed deferral opportunity because the employee reached 402(g) with only pre-tax dollars. So even if they were given a notice about deeming, the only choice they had is to opt out of deeming. They could not have increased their deferral rate to receive more pre-tax dollars. I don't see where a QNEC would be owed in this case because there is no missed opportunity. 

[Interested Party]

WCC . . . . Thanks for the response and providing an alternative perspective.