In-house payroll system programmed to allow catchup capped at $7500

Our payroll system allows catchup contributions all year long, as a separate "bucket", distinct from other contributions (401k, Roth, and 401a).  There is no control on whether the employee is on target during the year to qualify for catchup once they designate catchup contributions. 

We noticed an issue with some employees not deferring enough to meet the statutory limit, however the catchup functionality in the payroll system is programmed to stop at $7500, regardless of the amount of the deferral or satisfaction of the underlying statutory limit by the employee. 

In the case where an employee either doesn't qualify for all or part of the catchup because they didn't meet the statutory limit but designated catchup deferrals, the plan "recharacterizes" the catchup at year's end, but doesn't make any adjustment for match on the recharacterized funds, even if the employee wasn't provided their full match for the deferrals that year. 

Example on this is that in 2023, one employee was stopped $10,000 lower than the elected deferral to the "catchup bucket" (deferral was designated at approximately $17,510 into catchup) and didn't meet the statutory limit due to this cap (the employee contributed a total of $9000 to the pre-tax and Roth accounts).  The employee ended the year with ~$16,000 deferred instead of what she believes she designated (~$26,000).

I have two questions based on this situation:

1 - is stopping the contributions to the "catchup bucket" at $7500 generally a problem or an operational error when the employee elects a higher catchup amount than $7500?

2 - is there an issue with not retroactively contributing matching funds to the recharacterized funds if the employee didn't already receive their full match for the year?

Are the following three assumptions accurate (1) the plan document is written with a pay period match formula (no true up) (2) the document is written to not match catch up contributions (catch up being defined under 414(v)) (3) the document is not written to say something to the effect of... "deferral amounts attributable to the election entered under the "catch up election box" are not matched"? If so, my thoughts are as follows"

8 hours ago, campy said:

1 - is stopping the contributions to the "catchup bucket" at $7500 generally a problem or an operational error when the employee elects a higher catchup amount than $7500?

How is the deferral form written? Does it say your deferral election under this election stops when the catch up limit is reached? besides that, I don't have a great answer

8 hours ago, campy said:

2 - is there an issue with not retroactively contributing matching funds to the recharacterized funds if the employee didn't already receive their full match for the year?

If the assumptions above are correct, then I think you likely have a problem. Let's say your match formula is 100% on 6%. Your pay period match formula should be set up as follows: match = ((the lesser of ("regular deferral" % + "catch up" deferral %) or 6%)*capped eligible wages)) with match capped at $20,700 for 2024. The dollars contributed under the "catch up election" are not catch up dollars until they are and should be matched until they become catch up. Just because they are made under a "catch up" election doesn't make them catch up.

If the match formula is set up to not include the catch up election, then you may get lucky on some participants who are still correct. For example, if the participant had a 6% "regular" election and a 4% "catch up" election, then the match will be calculated correctly for that pay period even though the formula is wrong. But if someone has a 4% "regular" election and a 2% "catch up" election, then the match is short (until the catch up actually becomes a catch up). 

Side note - I am not a fan of dual elections for these reasons. I think it is much easier to manage one election and monitor the limits via payroll. Especially with 1.1.2026 changes. 

WCC - Thank you for responding. In response to your questions:
 

15 hours ago, WCC said:

(1) the plan document is written with a pay period match formula (no true up) (2) the document is written to not match catch up contributions (catch up being defined under 414(v)) (3) the document is not written to say something to the effect of... "deferral amounts attributable to the election entered under the "catch up election box" are not matched"?

1 - yes, the match is by pay period, not to exceed 7% of compensation for the pay period

2 - yes

3 - it says catch up is not matched - but doesn’t refer to the election method

WCC your next question: How is the deferral form written? Does it say your deferral election under this election stops when the catch up limit is reached? 

Response - not in my view - only during open enrollment, the web-based form  mentions that catch up is limited to $7500, but there’s no discussion about how the buckets are set up. I think it could be understood that catch up allows an extra $7500 in addition to the statutory limit, not that it’s a separate limit.