Written By Jenny Kiffmeyer, J.D – The Retirement Learning Center
How do the rules requiring mandatory Roth 401(k) catch-up contributions for high earners affect when a plan corrects an actual deferral percentage (ADP) testing failure?
Highlights of the discussion
The final Roth catch-up contribution regulations explicitly address the interaction between ADP excesses and mandatory Roth 401(k) catch-up contributions for high earners (i.e., “414(v)(7) failures”).
If a plan fails ADP testing and wants to avoid a penalty, the plan, typically, will distribute the excess within the standard ADP correction period:
- 2½ months after the plan year-end for plans without an eligible automatic contribution arrangement (EACA) (e.g., March 15th for a calendar year plan), or
- Six months after the plan year-end for plans with an EACA (June 30th).
If the plan does not correct the excess contributions within these timeframes, the employer would be subject to a 10% excise tax under IRC §4979.
IRC §414(v)(7) requires catch-up contributions of employees who earned more than $150,000 in 2025 to be made as designated Roth catch-up contributions for 2026. The deadline to correct a 414(v)(7) failure by recharacterizing them to designated Roth catch-ups is by the end of the next plan year.
Note: As you can see, the ADP correction window is much shorter than the 414(v)(7) correction window.
When there is both an ADP and a 414(v)(7) failure, the order of correction matters. Fixing the ADP failure first would require a distribution of the excess contribution; fixing the 414(v)(7) failure first would avoid a distribution, keeping the money in the plan. Employer liability for a 10% excise tax still applies if the ADP excess is not corrected on time.
Conclusion
When there is both an ADP and a 414(v)(7) failure, the order of correction matters. Even though a plan has longer to do so, if it corrects a 414(v)(7) failure before correcting an ADP excess by the 2 ½ month correction deadline, then the excess can stay in the plan, recharacterized as a valid Roth catch-up, with no distribution required and no penalty applying.
