New Mandatory Roth Catch-up Rule beginning January 1, 2026

The new mandatory Roth Catch-Up rule will affect certain participants beginning January 1, 2026, and which may require coordination with your payroll provider. This change is part of the SECURE 2.0 regulations and applies to employees who are considered Highly-Paid Individuals, or “HPIs”.  A Highly-Paid Individual for 2026 is an employee who had FICA wages in excess of $150,000 in 2025 (box 3 of the W-2).

What’s Changing

Starting in 2026, participants who are:

1)      Age 50 or older; and

2)      Have 2025 FICA wages in excess of $150,000 (as indexed annually for inflation); and

3)      Wanting to make catch-up contributions (including both the standard age 50+ catch-up and the new enhanced catch-up for participants ages 60 through 63):

Must make their catch-up contributions as Roth contributions (post-tax).  HPIs will no longer be able to make pre-tax catch-up contributions as long as they meet the high-income threshold outlined above.

These rules apply to participants in 401(k) and 403(b) plans starting in 2026, and will apply to governmental 457(b) plans starting in 2027.  Participants whose FICA wages are below the income threshold can continue to make catch-up contributions on either a pre-tax or Roth basis.  Participants who don’t receive FICA wages, such as partners and sole proprietors who only have self-employed income, are not subject to the new rule.

FICA wages are determined separately for each employer even if a participant works for more than one employer that maintains the plan, unless the employer elects to aggregate income from related employers sponsoring the plan.

What This Means for HPIs

• Standard deferrals can still be made on a pre-tax or Roth basis, whichever is elected.  The new rule only applies to catch-up amounts.

• HPIs will not be required to make a new election for the Roth catch-up.  The plan will consider their catch-up election to be deemed as Roth.  Participants can revoke their catch-up election if they choose not to be subject to the Roth catch-up mandate.

• If a Participant does not wish to have their catch-up contributions reclassified as Roth, they should be notified to make a new election to defer only the standard limit (as indexed). 

Correction Methods for Roth Catch-up that was Contributed as Pre-Tax

Because this is a new provision and the process to ensure compliance is complex, mistakes are likely to occur.  If an HPI has a catch-up contribution mistakenly made as pre-tax, there are three correction methods depending on the timing the error is identified:

• W-2 Correction Method – If the W-2 has not already been issued, any pre-tax catch-up, adjusted for gains or losses, will be transferred to the participant’s Roth account, and the catch-up contribution will be reported on the participant’s W-2 as Roth.  We expect limited use of this correction method as most W-2s will be issued prior to the discovery of an HPI that has pre-tax catch-up contributions.

  
  

• In-Plan Roth Rollover Method – Any pre-tax catch-up, adjusted for gains or losses, will be treated as an in-plan Roth rollover, and the catch-up contribution will be reported by the plan on a 1099-R for the year of the rollover.  The deadline for this correction is the end of the year following the year the contribution was made. 

  
  

• Refund to the Participant - If a participant elects to forego any catch-up contribution, and a catch-up contribution inadvertently occurs through recharacterization under the Plan’s compliance testing, the amounts that would otherwise be considered catch-up contributions will be refunded to the Participant.  This method may be used in other situations, such as when correction deadlines have passed, or if the plan does not have policies and procedures regarding Roth catch-up contributions.

Action Items:

Ask your Payroll provider to identify HPIs:   Ask your payroll provider if they will track and identify Highly Paid Individuals who exceeded $150,000 in prior-year FICA wages (indexed for inflation).  Although most major payroll providers will track HPIs, if your payroll provider will not track HPIs then you, as the plan sponsor, will need to do so.  Plans that have their payroll vendor identify and track an HPI can show good-faith compliance for deemed elections by having the payroll system automatically switch any contribution in excess of the standard deferral limit to Roth.  Establishment and reliance on this process is required in order to comply with the IRS correction methods outlined in the IRS final regulations. 

Save the attached “Roth Catch Up Practices and Procedures”:  Keep this document with your other plan document files.  The IRS requires plans to have practices and procedures in place in order to take advantage of all of the correction methods available.

Distribute the “HPI Notice”:  Please distribute the HPI Notice to your affected employees who are age 50+ and have prior year FICA compensation in excess of $150,000.  This notice details how your payroll system will handle catch-up contributions, and provides instructions should the HPI want to make a change to their withholdings.

Participant Deferral Election Methods:  Plan sponsors have historically administered catch-up contributions in one of two ways:

• Spillover Method:  The participant makes a single election, and contributions simply continue, or “spill over” as catch-up once a catch-up eligible participant has reached the year’s standard deferral limit.  If the participant is identified as an HPI, additional payroll deductions will automatically be made as Roth once the regular limit is reached.

• Separate Election Method:  The participant makes a separate election for catch-up contributions that are contributed concurrently with regular deferrals. 

If you are currently using the Separate Election Method we highly recommend changing to the Spillover Method, which is the method for easiest compliance with the new rules. 

We encourage you to reach out to your payroll provider, and to your assigned administrator, to answer any questions you may have in advance of the new year.