Determination of compensation for Roth catch-up for 2026

I think the answer is no but still would like to run this by the gurus.

Owner only plan over age 50.

For 2024, LLC filing as a sole-prop.

For 2025, LLC elected to file as an S-corp, no w-2s were taken. Also had schedule c income over 500k.

For 2026, only s-corp.

I do not think 2026 catch up needs to be Roth, agree?

W2 income triggers FICA in the Roth mandate rules, SE income doesn't.

(Ha, this is where we all come up with contingencies like the IRS is gonna go after the CPA not assigning any reasonable wages for the S-corp. officer.  But in a vacuum, no problem.)

To determine whether a participant is § 414(v)(7)-affected, a retirement plan’s administrator looks to the employer’s Form W-2 wage report of the participant’s wages in the preceding year.

26 C.F.R. § 1.414(v)-2(c)(3)(ii), https://www.ecfr.gov/current/title-26/part-1/section-1.414(v)-2#p-1.414(v)-2(c)(3)(ii).

I suspect no one yet has thought much about what retirement plan adjustments might become needed if an IRS examination asserts that a shareholder-employee did not pay herself reasonable compensation.

What if a settlement or a proceeding results in redetermining the shareholder-employee’s wages for one or more back years? Could that make a participant § 414(v)(7)-affected for some years? Must or should a retirement plan’s administrator adjust the individual’s account between non-Roth and Roth deferrals?

BenefitsLink neighbors, do we concur on these points:

?      A nonfiduciary service provider ought not to be responsible for relying on information the plan’s administrator (typically, closely aligned with the employer) furnished or instructed.

?      A plan’s administrator ought not to be responsible for relying on the employer’s Form W-2 wage reports unless the administrator knows the employer’s report is false.

The IRS does challenge whether a shareholder employee's wages are reasonable.  The IRS has not provided a prescribed formula or methodology for making this determination and most cases are resolved by the court.  When there is a finding that the compensation was not reasonable, there has been retroactive payment of payroll taxes and adjustments for compensation-based benefits.  To answer the first couple of questions, yes the issue can go back to prior years, and yes it could affect the characterization of elective deferrals.  The court will decide.

Regarding the question about a non-fiduciary service provider, in the ethics presentation in the ASPPA Spring National Conference last week, a very similar poll question was asked.  Only 1% of the audience said use the data provided while 68% said it was unethical for the service provider to use data that is inaccurate.  Does the service provider have a responsibility - maybe - but read the service agreement before answering.  Should the service provider rely on anything presented by the plan administrator - I believe most practitioners will have some level push back about inaccurate data.

Regarding the last question, for the majority of plans (which primarily are sponsored by smaller employers), the plan sponsor is the plan administrator and the individuals who hold that title often are not involved in routine payroll processing.  Similarly, a 3(16) plan administrator likely will not be involved in payroll processing. None of this relieves a plan administrator (keeping in mind this is a Named Fiduciary) of the responsibility to make sure that the W-2 information used in administering the plan is correct.

One question - how can there be any deferrals to be treated as a catch-up? My understanding is you can only make deferrals from compensation that is considered 415 comp. Wouldn’t that be $0?