SECURE 2.0 – IRS Proposed Regulations on Catch-Up-As-Roth Contributions Effective January 1, 2026

The Department of the Treasury and the Internal Revenue Service issued much-anticipated and welcomed proposed regulations on January 10, 2025, that address several SECURE 2.0 Act provisions. One of these provisions regulates the treatment of catch-up contributions for employees who are 50 or older. It applies to eligible participants in 401(k), 403(b), and governmental 457(b) plans. The IRS is accepting commentary on the proposed regulations until March 14, 2025.

Starting January 2026, employees who contribute to 401(k), 403(b), or 457(b) plans and who earned over $145,000 in FICA wages in the prior year (adjusted for inflation) must direct their catch-up contributions into Roth accounts (after-tax contributions) for the next calendar year. For example, employees who meet that threshold for 2025 must use Roth for catch-up in 2026.

The original deadline for this provision, as set forth in Notice 2023-62, was extended until taxable years beginning January 1, 2026. For employers with off-calendar plan years, the provision becomes effective on the first day of your plan year that starts in 2026. However, the wages considered are the prior year’s calendar-year FICA wages. 

Until this provision, nothing in 401(k)/403(b) limits used FICA wages as a data point. Payroll companies, plan recordkeepers and TPAs, and software providers must all make adjustments to accommodate this requirement.

Key considerations

  • For mid-year hires, you do not need to annualize their income or prorate the $145,000 threshold – you can use the FICA wages your organization paid them in the prior year. In general, for employees working for multiple employers, the compensation limit is determined per employer rather than aggregated across employers.
  • All catch-up as Roth: If a participant’s prior year FICA wages from the employer sponsoring the plan exceed $145,000 (indexed to 2024), then all catch-up contributions must be made on a Roth basis. It’s not split between contributions made before they hit $145,000 in FICA wages and after.
  • No special election needed: Employers may automatically switch participants to Roth catch-up as long as the participant is given the opportunity to opt out of this deemed election and stop their deferrals when the applicable IRS limit is reached. All of our plans’ participants may change their elections at any time, so this is not an issue for our clients.
  • No Roth feature? The regulations do not require a plan to include the Roth feature. However, 93% of all plans nationwide have it. If your plan does not have a Roth feature, we recommend you add it immediately.
    • No Roth feature, no catchup for these participants: If your plan does not offer a Roth feature, participants in the plan who meet the FICA income threshold must not contribute catch-up contributions. Other participants may continue to make their usual pre-tax catch-up contributions.
    • Removing catch-up = cut-back: Under the regulations, cutting back significant benefits, rights, and features of a plan is problematic. It would be difficult for you to remove the catch-up provision entirely from your plan unless you could justify doing so because it is seldom used.
    • Potential negative impact on nondiscrimination testing results: The contribution rates for your highly compensated employees (HCEs) are aggregated for the Average Deferral Percent test. If the plan fails the testing, we can reclassify some of the contributions as catch-up contributions and exclude them from the testing if doing so is advantageous. If these higher-paid employees are not eligible to make any catch-up contributions, you remove that arrow from the quiver.
  • If your plan has a Roth feature: Most plans do, so you are halfway there.
    • Roth catchup must be available to all. If any participants are allowed to make Roth catch-up contributions, then all participants must be offered the option.
    • Participants can contribute their pre-catch-up contributions as pre-tax. There is no requirement that all contributions be Roth. Only the catch-up for higher-paid employees is subject to this new Roth requirement.

This has implications for both payroll and your online elections process. Essentially, catch-up may have a separate election that both payroll and recordkeeping systems need to manage and integrate.

Correction Methods

If you don’t get this right to begin with and process pre-tax catch-up when it should have been Roth, there are two ways to correct it:

  • Payroll adjustments: Backing out pre-tax and reprocessing as Roth is not headache-free, especially if you are doing so close to the end of the year. If you make these changes after the end of the calendar year, you may have W-2 corrections to make.
  • Roth conversion: You may have the employee do an in-plan Roth conversion for the catch-up portion.

These correction methods have deadlines consistent with other deadlines for correcting contribution errors. To use the new correction methods, plans must have practices and procedures designed to comply with the Roth catch-up rules, incorporate the new correction methods under the plan, and adopt a deemed Roth election provision.

Responsibilities

  • You must determine employee eligibility for Roth-only catch-up contributions based on prior-year FICA wages and notify your recordkeeper and payroll provider (or have your payroll provider give you the report in the first place). If TRI-AD is your recordkeeper, we will work with you to make this determination because eligibility determinations are part of our full-service approach.
  • Payroll providers and plan recordkeepers must update their systems to track compensation and properly designate catch-up contributions as Roth when required.
  • The team will collaborate to keep contributions correct. It will be a collaborative effort: between payroll reports and limits, recordkeepers validating data upon import and flagging errors, and plan sponsors diligently processing payroll, your plan’s service team should be able to avoid pre-tax catch-up contributions that should be Roth.
  • Impacted employees who do not currently use the Roth feature should familiarize themselves with Roth and its pros and cons and decide how best to work these Roth contributions into their retirement strategy.

TRI-AD’s compliance team will provide additional information about the SECURE 2.0 Act in the coming months. If you have questions, please contact your TRI-AD Client Service Manager.

 

 

TRI-AD and our Associates’ suggestions or recommendations shall not constitute legal advice. No content on our website can be construed as tax or legal advice, and TRI-AD may not be considered your legal counsel or tax advisor. Clients are encouraged to consult with their tax advisor and/or attorney to determine their legal rights, responsibilities, and liabilities. This includes the interpretation of any statute or regulation, federal, state, or local; and/or its application to the clients’ business activities.