401(k)ology – Coming Soon: Mandatory Roth Treatment of Catch-up Contributions for High Earners

Age 50+ catch-up contributions have been available since 2002 and have provided older workers a mechanism to boost their retirement savings, especially if they had fallen behind in retirement savings earlier in their careers. The rules regarding catch-up contributions have not changed since they were first made available in 2002, that is until SECURE 2.0 was enacted at the end of 2022 mandating that certain “high earners” contribute catch-up contributions on a Roth basis. The unwelcome addition of an income cap limits the ability of certain employees who are over age 50 to elect catch-up contributions on a “pre-tax” basis.

Nothing says “happy 25^th birthday” quite like changing the tax treatment on older retirement plan participants’ beloved catch-up contributions. What the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) gave, the SECURE Act 2.0 taketh away. Effective January 1, 2026, there will be an income limit applicable to catch-up contributions that will require individuals with prior year FICA wages in excess of $145,000 (indexed) to contribute catch-up contributions as Roth.

The rules regarding catch-up contributions have been straightforward until now. To understand what changed and how retirement plans are impacted, we will discuss the pre and post SECURE 2.0 catch-up provisions, identify when a catch-up contribution occurs in plan operation versus participant election, and provide insight into handling the new provisions that are coming very soon!

Pre-SECURE Act 2.0 Catch-Up Contribution Rules

Since 2002, individuals who are aged 50 or older can contribute an additional amount in excess of the annual deferral limit (Internal Revenue Code §402(g)) in effect for the calendar year to their 401(k) plans (also includes 403(b) plans and governmental 457(b) plans). The additional amounts are referred to as “catch-up” contributions because they permit older employees to save more later in their working career. The following is a summary of the key provisions that applied under the EGTRRA catch-up rules since 2002 that remain in effect until 2026:

• Catch-up contributions can be made available to participants who turn age 50 or older by the end of that calendar year.

• The catch-up limit is indexed annually for inflation (in 2002 the limit was $1,000, which has increased in $500 increments since, up to $7,500 in 2025).

• Catch-up contributions can be made on either a pre-tax basis (traditional) or Roth (after-tax) basis if the plan permitted Roth deferrals.

• The same catch-up limit and ability to elect either pre-tax or Roth catch-up applies to all participants, regardless of income.

Under the pre-SECURE 2.0 rules, catch-up contributions are straightforward and easily managed by payroll providers and retirement plan service providers. Unfortunately, the same cannot be said about catch-up contributions in the Post-SECURE Act 2.0 era.

Post-SECURE Act 2.0 Catch-Up Contribution Rules

SECURE 2.0 significantly changed the landscape of catch-up contributions by mandating Roth catch-up contributions for “high earners” and adding an even higher catch-up limit for participants ages 60-63. The mandatory Roth catch-up provisions were initially effective January 1, 2024; however, the IRS delayed the effective date to January 1, 2026, because of the administrative burden and required software changes needed in both payroll systems and service provider compliance systems. The IRS is not expected to (again) delay the effective date of the mandatory Roth catch-up provisions beyond January 1, 2026.

The key changes in SECURE 2.0 regarding catch-up contributions are as follows:

• Super Catch-Up Contributions: Effective January 1, 2025, higher catch-up limit for participants who turn age 60, 61, 62 or 63 in the calendar year (aka “super catch-up”). The super catch-up limit is 150% of the standard catch-up amount (which is $7,500 in 2025), resulting in a catch-up limit of $11,250 for this age group in 2025 (150% times $7,500). As the standard catch-up limit increases with inflation adjustments, the super catch-up limit will increase as well. A participant must turn that age in the calendar year, so if the employee’s 64th birthday is in 2026, that employee is not eligible for the super catch-up in 2026.

• Mandatory Roth Catch-Up Contributions: Effective January 1, 2026, if a catch-up eligible participant earned more than $145,000 (indexed for inflation) in FICA wages in 2025 from the same employer (more on that later), then all catch-up contributions to the 401(k) plan must be made as Roth. And yes, that includes both the age 50+ catch-up eligible participants and the age 60-63 super catch-up eligible participants.

In January 2025, the IRS and the Department of the Treasury issued proposed regulations addressing some of the complexities with the new catch-up rules. While the proposed regulations did address many of the outstanding issues in administering the new catch-up rules, there remains a need for additional guidance on certain provisions. It is expected that final regulations will be issued later in 2025, although the hope is that will be before December!

Now let’s dive into why these new rules are anything but straightforward.

Highly Paid Individuals (aka “High Earners”) Subject to Mandatory Roth Catch-Up Contributions

The “high earners” portion of the new mandate is likely the part that causes the most consternation. Many professionals in the industry and plan sponsors have asked why it was not tied to an already tracked compensation limit, like the compensation used to determine Highly Compensated Employees ($160,000 in 2025) or even the annual compensation limit under IRC §401(a)(17) ($350,000 in 2025). Some of the answers lie in the fact that the mandatory Roth provision is designed as a revenue raiser for the government. But why $145,000, and why FICA wages?

Tying the limit to what an employee earned in the prior year subject to FICA wages has many heads shaking because that compensation is not tracked for any other retirement plan purpose. It also requires plan sponsors to add yet another item to review for compliance.

Federal Insurance Contributions Act (FICA) deductions are the payroll taxes that fund both Social Security and Medicare, providing financial security and healthcare coverage for retirees, disabled individuals, and children. FICA taxes are required to be paid by any employee whose compensation is reported on Form W-2 (FICA wages are reported in Box 3 and 5). That leads to the first unfair consequence of how the current regulations are drafted, because self-employed individuals report compensation on a Schedule C (Form 1040) or on a Form K-1 (not on a Form W-2). As a result, a partner in a partnership (LLC, LLP) earning $500,000 in 2025 is not subject to the mandatory Roth catch-up provisions, but that partner’s non-highly compensated employee who earns $150,000 in FICA wages in 2025 must make catch-up contributions as Roth starting in 2026. Partner gets the additional tax deduction, while the lower-paid employee does not.

Another wrinkle in the high earner determination is that for all other applications regarding plan operation, related employers are treated as a single employer for purposes of the qualified plans they sponsor, and all compensation paid under the related employer umbrella to a single individual is aggregated for plan purposes. Well, now there is an exception to that rule. Solely for purposes of determining if an employee qualifies as a high earner for mandatory Roth catch-up contributions, only the FICA wages paid from a single entity are considered, even if the combination of FICA wages paid under a group of related entities would exceed $145,000.

As an example, assume that Company A and Company B are related employers and both entities participate in the same 401(k) plan. Joe is part owner of both entities and receives W-2 compensation from both Company A and Company B. Employees 1 and 2 only receive income from one of the entities but earn less than Joe.

Joe is a Highly Compensated Employee because he is a more than 5% owner and also has compensation in excess of $160,000 in 2025. Both Employee 1 and Employee 2 are Non-Highly Compensated Employees. However, under the mandatory Roth catch-up provisions, Joe can continue to make pre-tax catch-up contributions, but Employees 1 and 2 are high earners who cannot.

At this point, it is unclear if any changes will be included in the final regulations to address the inequitable compensation definition used to determine high earners (including aggregating compensation from related employers) and/or will modify the proposed regulations as it relates to the self-employed individual’s ability to make pre-tax catch-up contributions regardless of income. Until the final regulations are released, these are the rules by which we must abide.

Electing Catch-up Contributions vs. Reclassified Catch-up Contributions

When is a catch-up contribution really a catch-up contribution? Some likely believe that if the plan offers a separate election for age 50+ catch-up contributions, then those contributions in the “catch-up bucket” are just that. However, a salary deferral contribution only becomes a catch-up contribution once it exceeds a limit. Following are examples of when regular deferrals are considered catch-up contributions:

• Deferrals over the §402(g) limit – All deferrals (pre-tax plus Roth) made to a plan are regular deferrals until the employee has deferred at least the deferral limit for the calendar year ($23,500 in 2025). For example, an employee who makes a separate catch-up election in January plus a regular deferral election but terminates in June after deferring a combined amount of $17,000 does not have any catch-up contributions. $17,000 is the total deferred to that plan, none of which is considered “catch-up” contributions.

• Total Contributions in excess of the §415(c) Annual Additions limit – If the total amount allocated to an employee in a single employer’s plan exceeds $70,000 (2025 limit), then the contributions and forfeitures allocated in excess of $70,000 up to $77,500 are classified as catch-up even if the employee only made deferrals totaling $23,500 (2025). For example, an employee defers $23,500 in 2025, receives a 100% match of $23,500 and makes after-tax contributions totaling $27,000 for a total of $74,000. The employee has catch-up contributions due to exceeding the $70,000 limit of $4,000, even though the deferral limit of $23,500 was not exceeded.

• Contributions Reclassified as catch-up contributions due to a failed ADP/ACP Test – If a 401(k) plan fails either the ADP or ACP test (or both) any excess that would be refunded can first be reclassified as catch-up contributions as long as the affected 50+ aged Highly Compensated Employee (HCE) has not deferred more than $31,000 (for 2025). For example, an HCE is due a refund totaling $10,000 due to a failed ADP Test and deferred a total of $23,500 in 2025. $7,500 of the $10,000 excess will be reclassified as catch-up and the refund due the HCE would be $2,500.

Note that the same principles apply for the super catch-up for those ages 60-63 except that $11,250 is substituted for $7,500 (2025).

What happens starting in 2026 when reclassified catch-up contributions must be Roth for high earners who are also HCEs? This is where things get more complicated. Deferrals that are reclassified as catch-up contributions (e.g., §402(g) excess or ADP/ACP Test failures) will need to be treated as Roth even though the contributions were made on a pre-tax basis. That may only happen administratively if the plan implements the Deemed Roth Catch-up Election (more on that below). Even if the plan adopts the Deemed Roth Catch-up Election, a Roth conversion due to exceeding the §402(g) limit must be corrected by April 15^th of the following year, and if due to an ADP failure within 2.5 months after the plan year end (March 15^th for calendar year plans). At this time, it is unclear what consequences apply for plan sponsors that fail to meet these deadlines. Fingers crossed that the anticipated final regulations provide relief in these circumstances.

Note: Plans with Eligible Automatic Contribution Arrangements (EACA) have a 6-month after the end of the plan year ADP/ACP testing deadline, and that currently does not jive with the 2.5-month deadline for the reclassification of deferrals as Roth catch-up contributions under these rules!

Deemed Roth Catch-up Elections vs. Separate Catch-Up Election

There are a few different ways to handle the mandatory Roth catch-up contributions. Plan sponsors could require that high earners subject to the mandatory Roth provisions complete a separate catch-up election, or plan sponsors may adopt a “deemed” Roth catch-up election. The issue with the separate catch-up election is that (as noted above) a catch-up contribution does not qualify as such until the employee exceeds a limit (e.g., the standard §402(g) deferral limit). Requiring high earners to make Roth deferrals early in the year may negatively impact the employee, especially if they terminate employment before any limits are reached.

The deemed Roth catch-up election uses the “spillover” approach for all participants subject to the mandatory Roth catch-up provisions. This means that once the employee reaches a limit, future deferrals are treated as Roth even without a catch-up (and potentially without a Roth) election by the participant. However, participants must be notified and given the opportunity to make a different election (i.e., they could elect to cease deferrals at the limit rather than having any further deferrals deemed Roth).

Deemed Roth catch-up elections come with a few perks that are not available with the separate election approach:

• Plan administrators do not have to obtain a separate election from those participants subject to the new Roth catch-up rules, simplifying the administrative process for both the participants and the plan sponsor.

• Plans with the deemed Roth catch-up election have two new correction methods available when errors occur in operating the mandatory Roth catch-up provisions.

  • Form W-2 correction method: This method, which may only be used if the participant’s Form W-2 for the year of deferral has not yet been filed with the IRS or provided to the participant, allows the amount of the disallowed pre-tax elective deferral (adjusted for gain or loss) to be transferred to the participant's designated Roth account in the plan, and reported as a designated Roth contribution (but not adjusted for gain or loss) on the participant’s Form W-2 for the year of the deferral.

  • In-plan Roth rollover correction method: The disallowed pre-tax elective deferral (adjusted for allocable gain or loss) may be directly rolled over to the participant’s designated Roth account in the plan and reported (including the gain or loss adjustment) as an in-plan Roth rollover on Form 1099-R for the year of the rollover.

Given the simplicity of the deemed Roth catch-up election and the availability of additional correction methods, it is anticipated (and recommended here) that most plan sponsors will opt for the deemed Roth election spillover approach rather than the separate election.

There is some good news, though: Any Roth deferrals made at any time during the year may count toward the Roth catch-up requirement, regardless of when they were deferred in the year.

Plans without Roth Provisions

Over 86% of 401(k) plans offer a Roth provision, based on recent industry surveys from sources like the Plan Sponsor Council of America (PSCA) and Vanguard. This number has steadily increased over the past decade as Roth options have become more popular due to their tax-free withdrawal benefits in retirement.

However, if the plan does not include Designated Roth contributions, high earners subject to the mandatory Roth catch-ups will not be able to make ANY catch-up contributions. Obviously, that can have a negative impact on older workers who are trying to make up for shortfalls in savings as they approach retirement.

Such plans should consider adding Roth deferrals to the plan design before January 1, 2026, so that all participants (high earners or not) have the ability to make catch-up contributions.

Conclusion

The evolving landscape of catch-up contributions—particularly the introduction of the super catch-up for ages 60 to 63 and the mandatory Roth catch-up rules for high earners—presents both opportunities and administrative challenges for plan sponsors and participants alike. While the IRS’s proposed regulations have clarified several aspects, key questions remain, especially around reclassified contributions and correction deadlines. The deemed Roth catch-up election offers a streamlined and flexible approach for compliance, reducing administrative burden and providing additional correction methods. As final regulations are anticipated later in 2025, plan sponsors should proactively evaluate their plan designs and communication strategies to ensure a smooth transition and continued compliance with these complex new requirements.

Newfront Retirement Services’ team of advisors and dedicated service team are always available to help plan sponsors navigate through new regulations and to assist in plan design changes given the new rules. Feel free to contact me or just connect to keep up to date on all things ERISA 401(k): Joni_LinkedIn and 401(k)ology

Helpful Links:

• Proposed Regulations on new Roth catch-up rule

• Retirement topics – Catch-up contributions

• Retirement topics – 401(k) and profit-sharing plan contribution limits

• 403(b) plans – Catch-up contributions

• 401(k) plan fix-it guide – IRC Section 402(g) excess

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