Withholding as Pretax for 2022 when should have been Roth

An employee had withholdings done as pre-tax instead of Roth and didn't notice until they saw their W-2.    I'm sure Ascensus will just say have the plan sponsor give us instructions and we will move the contributions and earnings (loss actually) from pretax to Roth.

Is there a prescribed fix for this?  Seems fixing payroll is the only reasonable correction.  Not sure what else would be equitable.  

Thank you.

Amend the W-2.

Change the source at the custodian.

Fix the problem going forward and document procedures.

That seems the most straight forward and seems like a reasonable correction that should fall under the IRS self correction program.

The IRS addressed this situation directly in the article Fixing Common Mistakes - Correcting a Roth Contribution Failure.  You can find it at

https://www.irs.gov/retirement-plans/fixing-common-mistakes-correcting-a-roth-contribution-failure

It offers 2 solutions:

Fixing the mistake

To fix the mistake of not following an employee’s election to designate the contribution as a Roth contribution you must transfer the deferrals, adjusted for earnings, from the pre-tax account to the Roth account. There are two options on how to report this transfer:

1. The employer issues a corrected Form W-2 and Marcie must file an amended Form 1040 for the year of the failure (2013).
    
2. The employer includes the amount transferred from the pre-tax to the Roth account in Marcie’s compensation in the year it’s transferred (2014). If the employer elects, it may compensate Marcie for the additional amount she owes in income tax in 2014. This must be included in Marcie’s 2014 income.

Note that is says you must transfer the deferrals. 

Is there any information on the option of processing an in-plan Roth rollover, when the election is Roth but the deduction/remittance was Pre-Tax?

That seems similar but simpler than the plan sponsor adding the amount to the participant's compensation, because if treated as additional compensation, that would need to be added to compensation, but not subject to FICA tax.   So it would require a special deduction code on payroll, or a negative 401k deduction, which would alter the participant's current year YTD deferrals.  Or a 1099 would have to be issued.  I can't find anything on this, but would love to use that option when correcting, if available.

On 3/7/2023 at 4:35 PM, Tom said:

An employee had withholdings done as pre-tax instead of Roth and didn't notice until they saw their W-2.

Was there a written election to contribute roth?