Application of deemed Roth provision

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?

you are vastly over thinking this. 

First - participants don't get to say that their first $500 of deferrals (Roth or otherwise) are catch-up. Catch-up does not occur until a limit is exceed, or a reclassification occurs such as with a ADP test. 

they can say "If I have catch-up I want it done as Roth", or "if I exceed the regular 402(g) limit I want my deferrals to stop rather than have any catch", or "I think I will do the max deferrals, so I'm preemptively electing to do my deferrals as 50% Roth and 50% pre-tax" etc. 

Assuming there are no testing issues - 

At the end of the year - the HPI participant's deferrals are reviewed. If they are over the regular 402(g) limit, then the next question is "Does the participant have Roth deferrals that occurred during the year, such that the amount in excess of the 402(g) , is at least equal to the amount to be classified as catch-up?"
Even if the person deferred Roth for the first half of the year, and pre-tax for the second half, if their Roth dollars are enough to satisfy the amount, then that's good enough. 

As far as an election by the participant - I would encourage plans to let their participants know - they can elect a portion Roth, and a portion pre-tax, and if the participant thinks they will go over 402(g) then they should probably try to elect enough Roth (either up front or throughout the year) so that it is going to be satisfied. 

If the participant election is such that "If I have catch-up contributions, I want them to be Roth" well then that's a different calculation. pre-tax would occur until the reach the regular limit and then Roth for the remainder of the year. 

If a participant is saying " if I am HPI and I have catch-up I want it done as Roth", and the plan would like to change the language on the deferral election form to be more specific, such that the election expires if the person is no long HPI, I suppose they could. but seems like it complicates things. 

"If I am a HPI and I have catch-up dollars I want them done as Roth and this election shall apply until I am no longer HPI, at which point my regular election will apply"
"If I am not HPI and I have catch-up dollars my regular election will apply"
"If I am HPI and do not make an election ..."

the permutations seem endless... 

I think a simpler thing would a regular deferral election with an additional box:

"If I am HPI I understand any dollars classified as catch-up will be classified as Roth deferrals unless I check the box below, in which case my deferral contributions will cease or be returned to me in the event I reach the regular non-catch-up deferral limit. This election shall remain in place until a new election form is completed" 

as an aside ERISApedia is having a webinar on this topic later this month. I plan on watching. I'm sure I will learn a few things and perhaps correct my understanding if i'm mistaken. 

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?

If the plan allows, the participant would fill out an election form at the beginning of the year that says "10% pre-tax deferrals each pay period, less the following: 5% Roth deferrals per pay period, with the Roth portion capped at $8,000" 

My interpretation is as follows:

19 hours ago, Megan G said:

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?

since this is a plan that uses separate elections, presumably the "catch-up" source is capped at the catch up limit $7,500 (2025). I understand what justanotheradmin says about when a catch-up is technically a catch-up. This has always been a problem with separate election plans (e.g. plans that don't match catch-up so they incorrectly don't take into account deferrals made under the "catch-up" election). But if you have and will take the position the "catch-up" is a catch-up, then I don't see why it would revert back to pre-tax catch-up once the catch-up limit is reached.

19 hours ago, Megan G said:

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?

I think the effective opportunity language in the final regs say they can make a different election anytime. Since you are deeming them on the first pay period, they can opt-out or choose pre-tax catch-up since they are also contributing "regular" Roth. How you will actually do this automatically on a large scale is yet to be seen.

19 hours ago, Megan G said:

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?

they need to have an effective opportunity to opt out. So presumably they have the choice on the 12 pay period to continue having 10% PT and 10% Roth withheld. 

19 hours ago, Megan G said:

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.

Ideally payroll would make the calculation change when pre-tax reaches 401(a)(30), not when the total deferrals reach 401(a)(30). But if payroll can't do that, then it will likely need to be a manual process. 

19 hours ago, Megan G said:

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?

Yes, because the limits start over in 2027 and deeming now looks at the 2027 plan year. They would then contribute 10% as pre-tax and 10% as Roth until you deem again in 2027. This assumes there is no deferral election activity in between.

Couple of clarifications:

1. No forms are used for elections, online or over the phone only
2. Plan sponsor has no desire to let participants self-monitor and deal with the correction fallout.
3. Assume the payroll system has not been upgraded to stop Roth at a certain amount or prevent a pre-tax catch-up contribution from being deducted for a HPI. It will cap at the normal limits.

Basically, the deemed Roth needs to be controlled by what they are allowed to elect in terms of contribution rates as a flagged HPI effective within 1-2 pay periods. 

I will be attending the ERISApedia webinar as well as the NAPA one tomorrow. Hopefully they will get into the practical application.  

This is a TL:DR post so sorry if I am repeating what someone else said...

Q1a... don't see in the regs (or anywhere else) anything that permits the plan to recharacterize a "pre-tax catch up" election and deem it a regular pre-tax contribution.  Once they hit the limit of $8,000 in Roth catch-ups they can no longer contribute any catch-ups.  Since can't do any more catch ups, no pre-tax catch-ups either.

Q1b... again, once they hit the $8,000 limit, how can they elect "pre-tax catch-up"??  Perhaps you mean they can go back an increase their regular pre-tax election but that is not what you are saying (or doing).

Q2a, b, c...  why do it that way.... Under your facts, their limit is $24,000 + $8,000.  So, they keep contributing a $1,000 pretax and $1,000 Roth until week 16.  At weeks 13, 14, 15, and 16 the $1,000 Roth deferral is converted to a $1,000 Roth catch-up (so $4,000 Roth catch up), also, at the end of weeks 13, 14, 15, and 16 $1,000 of the previously contributed regular Roths are now deemed Roth catch-ups (so additional $4,000 catch up after 4 weeks).   Note, under the regulations, a spillover doesn't apply until (1) the HCI's YTD pre-tax deferrals reach the 402(g) limit or (2) the HCI's YTD aggregate (pre-tax and Roth) deferrals exceed the annual limit.

And yes, you communicate to them that they can switch anytime... you may want to do follow-up communications.  The key is simply communicating with the participants.

It would seem based on your clarifications that the Plan Sponsor's options are -

1 - fix it's payroll to deal with the law change.

2-elimated catch-up altogether by plan amendment.

3-deal with fixing any errors after the fact.