ADP Failures and Roth Catchups
When there is both an ADP and a Roth catch-up failure under IRC §414(v)(7), the order of correction matters.
Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in Pennsylvania is representative of a common question on mandatory Roth 401(k) catch-up contribution requirements.
"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 15) for a calendar year plan), or
Six months after the plan year-end for plans with an EACA (June 30).
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.
