Employee Benefit Plans Alert — Winter 2026 Edition

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This edition of our Employee Benefit Plans Alert focuses on the following topics:

• Catch-Up Contributions
• Audit of Financial Statements/Findings
• Post-Separation Compensation Clarifications
• Affordable Care Act Form 1095-C Filing Requirements
• New York State Retirement Program

Catch-Up Contributions

Roth Contributions

Beginning January 1, 2026, new rules apply to 401(k), 403(b) and governmental 457(b) plans regarding catch-up contributions. The additional elective deferrals ($7,500 in 2025, $8,000 in 2026) that plan participants aged 50 or older can make above the regular annual individual contribution limit ($23,500 in 2025, $24,500 in 2026) will need to be made on a Roth basis (i.e., after tax) for those employees whose prior-year Social Security wages exceed $150,000. These employees are referred to as highly compensated individuals (HCIs).

Note: The $150,000 threshold is determined using the prior calendar year’s W-2 wages and Box 3 Social Security wages and applies separately to each employer. That dollar amount is not aggregated in cases of a controlled group of employers.

If the plan does not permit Roth contributions, then these HCIs cannot make catch-up contributions. This $150,000 threshold amount is indexed annually for inflation and applies only to employees, excluding partners or self-employed individuals. For participants aged 50 and above who do not exceed the wage threshold, they may continue to make catch-up contributions on a pre-tax or Roth basis, assuming the plan allows.

A retirement plan that currently offers no Roth feature must be amended by the end of the 2026 plan year to permit Roth contributions. The employer should notify the plan’s recordkeeper of the 2025 HCIs and ensure the payroll process has been modified to account for the change. It is also recommended to communicate this change of classification of the contribution to the affected participants.

Employers cannot require all catch-up contributions from all participants to be Roth contributions. This violates the IRS regulations as they require an employee election for a Roth contribution. Also, employers cannot limit Roth catch-up contributions only to HCIs. If Roth catch-up contributions are allowed for any participant subject to the Roth catch-up rule, they must be available to all catch-up eligible participants.

Deemed Election Versus Affirmative Election

The IRS has provided an alternative process pertaining to the administration and available correction methods involving catch-up contributions. The deemed election simplifies plan administration and provides special correction methods that are more favorable to participants. If the plan provides for a deemed election, it must also provide the participant with an effective opportunity to make a new election that is different from the deemed election. Further, the deemed election must cease within a reasonable period after a participant is no longer subject to the HCI Roth catch-up requirement.

“Spillover” Design Issue: A plan may deem a “spillover” amount as Roth contributions without regard to any Roth contributions made earlier in the year. A plan may choose to apply the deemed election either:

• Once the employee’s year-to-date pre-tax deferrals reach the annual limit.
• Once the employee’s year-to-date aggregate (pre-tax and Roth) deferrals exceed the annual limit.

An affirmative election requires participants to actively elect catch-up contributions separately from their deferral elections and is often used to avoid forcing unintended taxable Roth contributions. This would appear to be the less chosen method but may be needed in situations due to limitations of the payroll system(s).

Correction Methods

IRS regulations provide for two correction methods for instances when catch-up contributions should have been Roth but were made pre-tax. The correction methods cover elective deferrals exceeding (1) a statutory contribution limit or the aggregate contribution limit of $72,000 for 2026, (2) an employer-provided limit or (3) the average deferral percentage (ADP) limit. The correction requirements differ depending on the underlying reason for the error.

Form W-2 Correction Method: A plan may transfer the catch-up contribution (adjusted for earnings/losses) from the HCIs pre-tax account to their designated Roth account and report the contribution (not adjusted for earnings/losses) as a designated Roth contribution on their Form W-2 for the year of deferral. This method is only available if the Form W-2 for that year has not yet been filed or furnished to the participant.

In-Plan Roth Rollover Correction Method: A plan may directly roll over the elective deferral (adjusted for earnings/losses) from the participant’s pre-tax account to their designated Roth account. This correction does not require a voluntary participant election. The final regulations confirm that a plan may utilize this correction method even if it does not permit participant-elected in-plan Roth rollovers because the transfer is being made by the plan and not at the election of the participant and that it is an administrative detail and not a benefit, right or feature subject to Internal Revenue Code (IRC) Section 401(a)(4) nondiscrimination testing.

A plan may use either of the preceding methods, but it must apply the same correction method to similarly situated participants.

The final regulations do not require a plan amendment, but the plan must have “practices and procedures” in place to utilize the correction methods. If the excess contribution is due to exceeding the annual individual contribution limit, then the plan’s practices and procedures must include the deemed Roth catch-up election.

Correction Deadlines

The deadline to correct a failure using these correction methods depends on which limit is the basis for the recharacterizing of the pre-tax deferrals as Roth catch-up contributions:

Correction for Exceeding the Individual or Aggregation Annual Contribution Limit: A plan must correct failures relating to a statutory dollar limit by the end of the taxable year following the year the contribution was made. An exception to the general timing of correction occurs when a deferral amount exceeds the individual deferral limit. The correction deadline is April 15 of the calendar year following the calendar year for which the deferral was made. Timely correction avoids double taxation of the excess amount applied to the participant.

Correction for ADP Failure: The correction must be made by the end of the plan year following the plan year the excess contribution was made.

De Minimis Exception Rule

There are de minimis exceptions to the correction rules. Correction is not required if either the:

• Pre-tax deferrals that should have been Roth do not exceed $250.
• Employee’s Federal Insurance Contributions Act (FICA) wages are determined to exceed $150,000 on account of adjustments made after the correction deadline.

The adjusted W-2 exception allows a plan to avoid making corrections when the employer discovers a payroll error requiring an amended Form W-2 after the correction deadline.

Audit of Financial Statements/Findings

Audits of financial statements of qualified retirement plans, 403(b) plans and health and welfare plans for calendar year ending December 31, 2024, were recently completed. The following are some of the more common audit findings noted from those audits including the recommendations that were provided to the plan sponsors.

Employee Contributions

The late remittance of participants’ contributions and loan repayments is becoming a more prevalent issue among plans. The Department of Labor (DOL) requires that participants’ contributions and loan repayments be remitted to the plan on the earliest date on which they can be reasonably segregated from the company’s general assets but no later than the 15th business day following the end of the month in which the amounts are contributed by employees or withheld from their wages. Based on our experience of representing plans on DOL investigations, this timing matter is reviewed and compared to when employee contributions are segregated and used to pay premiums for other benefits (e.g., health, disability) or the timing of the payment of employment taxes.

Failure to remit participants’ contributions and loan repayments to the plan in a timely manner results in a prohibited transaction which must be separately reported to the DOL as a footnote disclosure as well as on a supplemental schedule. The Form 5500, Schedule H, also reports the amount.

There are many procedures that can be implemented by employers to help prevent these late deposits including automation of funding, implementing same-day reconciliation of payroll files to trust confirmations and ensuring that there are at least two trained staff that can release wires/Automated Clearing House (ACH) payments in cases of absence/vacation.

Use of Forfeitures

The usage of plan forfeitures has also become a common audit finding. Forfeitures may be used, if allowed by the plan document, to pay plan expenses, reduce employer contributions or may be allocated back to participants’ accounts on a nondiscriminatory basis.

The IRS issued guidance in February of 2023 in the form of a proposed regulation to inform plan administrators of a clear deadline for using forfeitures. The regulation’s effective date is for plan years beginning on or after January 1, 2024, and they also provided a transition period for accumulated forfeitures that occurred prior to January 1, 2024. For defined contribution plans the guidance provides those forfeitures be used no later than 12 months after the close of the plan year in which they occurred. Therefore, forfeitures incurred in the 2024 plan year must be used by end of the 2025 plan year.

Audit findings are determining more plans are not adhering to the 12-month rule and many of them are also using the forfeitures in a manner that is not permissible and is not consistent with the plan document. A best practice for plans includes the establishment of a written forfeiture policy aligned with the plan document and quarterly sweeps of the forfeiture account. When needed, coordination with the plan recordkeeper to promptly apply forfeitures is needed.

Post-Separation Compensation

IRS regulations only permit certain types of compensation paid after employment has terminated to be treated as plan eligible compensation and only if that compensation meets specific timing and substance requirements. The rules to include post-employment compensation that can be included must be made no later than two and a half months after separation from service or the end of the limitation year, including the date of separation.

Qualifying payments may include vested and accrued leave time, including paid time off (PTO), vacation and sick time. Others include short-term payments that would have been paid even if employment continued, like commissions for sales made prior to termination or bonuses or incentive pay that relates to service before termination. Basically, the payment would have been paid to the employee prior to termination of employment if the employee had remained employed.

Regarding employee deferrals, the general rule is you must be employed at the time the compensation is paid. Post-employment compensation cannot be deferred into a 401(k) plan. Employer contributions may be eligible only if they are included in the definition of compensation and the payment qualifies under IRS rules.

Plan administrators should refer to the plan documents to gain an understanding of the rules of the plan and the definition of compensation when calculating deferrals for terminated employees.

Affordable Care Act Form 1095-C Filing Requirements

Information in IRS Notice 2025-15 provides that employers are no longer required to automatically furnish the Affordable Care Act (the Act) Forms 1095-C (health insurance statements) to employees and it provides an alternative way for employers to provide these forms to satisfy the disclosure requirements of the Act. This change is designed to ease the administrative burden associated with health insurance reporting.

Alternative Reporting Option: The Notice introduces a more flexible approach to delivering the Form 1095-C. This includes:

• Employers can satisfy the new 1095-C reporting requirements by posting a clear and conspicuous notice that is accessible to all applicable employees on an employer’s intranet website.
• The notice must inform individuals that they can request a copy of their Form 1095-C and instructions for requesting the form.
• The notice must be posted on the employer’s website by the time that the Form 1095-C would otherwise need to be furnished to individuals and must remain up on the employer’s website through October 15 of the year following the calendar year to which the statement relates.
• If requested, the employer must provide the Form 1095-C to the requesting individual by the later of:
  • January 31 of the year following the year to which the Form 1095-C relates.
  • Within 30 days of the date that the request is received.
• The notice must be written in plain language and satisfy other particulars regarding lettering size and other features to facilitate its understanding.
• The notice must include the employer’s email address, physical address and telephone number for individuals to contact with questions.
• Employers must continue to observe any state requirements for furnishing Forms 1095-C, as some states still require that Forms 1095-C be physically mailed to individuals. In addition, Forms 1095-C must still be filed with the IRS, even if they are not provided to all employees.

Due Dates

• March 2, 2026: Paper copies of Forms 1094/5 mailed to IRS.
• March 2, 2026: Paper copies of Form 1095 mailed to recipients and/or employees (if furnishing automatically).
• March 31, 2026: E-file Forms 1094/5 with IRS.

New York State Retirement Program

New York employers should get ready to comply with or certify their exemption from the New York State Secure Choice Savings Program (NY State Program), the state’s mandatory employer-facilitated retirement savings program that the state is now implementing following its enactment in 2021. The NY State Program joins 20 other states that have enacted state-sponsored retirement programs.

Covered employers will need to begin the process enrolling eligible employees in a Roth IRA (i.e., after-tax contributions) through the NY State Program by recently announced dates in 2026. Specifically, covered employers must register according to the following dates, based on their number of employees:

• Employers with 30 or more employees: March 18, 2026
• Employers with 15 to 29 employees: May 15, 2026
• Employers with 10 to 14 employees: July 15, 2026
• Employers that already sponsor a qualified retirement plan (i.e., a 401(k), profit-sharing, defined benefit) are not required to enroll employees in the NY State Program.
• In addition, small employers with fewer than 10 employees in the previous calendar year and employers that have been in business for fewer than two years are not required to facilitate enrollment in the NY State Program.

Eligible employees must be employed by participating employers, be at least 18 years old and must have earned taxable wages from a New York employer.

Unlike with qualified retirement plans, employers are neither required nor permitted to make employer contributions to an eligible employee’s Roth IRA (post-tax) in the New York Secure Choice program. Instead, an employer’s role is limited to facilitating employee participation in the program. There are no fees to employers, but employers must automatically deduct enrolled employees’ set contribution amounts to their Roth IRAs established under the program. Employee expenses include an annual asset-based fee between 0.22% to 0.31%, depending on an enrolled employee’s investment choice(s).

Operational Matters

To facilitate employee enrollment or certify their exemption from New York Secure Choice, employers will need to provide their employer identification number (EIN) and an access code that the New York Secure Choice program will send to employers by email or letter.

According to the program, enrolled employees will receive information directly from the NY State Program. If employees do not set their own contribution amounts after 30 days, the law provides for an automatic 3% of gross pay as the employee’s contribution per pay period, which amount can be changed by the employee. Employees also have the option to choose their own investments under the program.

Key Points

Secure Choice is a state-sponsored retirement savings program designed for private sector employees who lack access to a workplace retirement plan. Under the program, eligible employees of participating employers are automatically enrolled in a Roth IRA, though they may opt out at any time. The accounts are also portable, allowing employees to retain their savings even when changing jobs. Employers are not required to contribute to the accounts, manage investments or assume any fiduciary responsibility. Their sole obligation is to facilitate employee participation by enabling payroll deductions.

Contact Us

The Employee Benefit Services Group at PKF O’Connor Davies is available to assist plan sponsors in meeting the various compliance requirements applicable to their plans. We also provide a full spectrum of compliance services for qualified retirement plans, non-qualified deferred compensation plans and welfare plans. For more information, please contact your client services partner or either of the following: 

Timothy J. Desmond, CPA
Partner
Employee Benefit Services Practice Leader
tdesmond@pkfod.com | 551.249.1728

Louis F. LiBrandi, EA, CEBS, ChFC, TGPC
Partner
Employee Benefit Services Group
llibrandi@pkfod.com | 646.449.6327