The December 2022 law known by many as SECURE 2.0 included an emphasis on Roth contributions in 401k and 403b Plans. One of the changes impacts catch-up contributions, which are “extra” individual deferral contributions available for those 50 or older.
Beginning January 1, 2026, catch-up contributions for certain “highly paid” individuals must be taxed as Roth contributions rather than pre-tax employee contributions. “Highly paid” individuals will be defined as those whose prior year FICA wages were at least $145,000 (indexed for inflation). It is important to understand that this “highly paid” designation that will require Roth catch-up contributions is different from “highly compensated employees”, which is used in many other aspects of retirement plan compliance work.
The IRS recently provided some guidance for employers, payroll providers, recordkeepers, and third party administrators (TPAs) to prepare for 2026. Below are important technical rules included in this guidance:
- Individuals with no FICA wages (e.g., partners who have only self-employment income) are not subject to the mandatory Roth catch-up contribution rules. It does not matter how much the individual’s self-employment income is.
- The wage limit applies to actual prior year FICA wages. It is not prorated for a partial year of employment. Therefore, an employee whose annual rate of pay would put them over the limit may not be “highly paid” for this purpose if the employee only worked a partial year during the preceding year.
- There may need to be corrections to W-2s, or a Form 1099-R may have to be issued, if a contribution originally made as a pre-tax deferral must be recharacterized as Roth (e.g., to assist with passing ADP/ACP nondiscrimination testing).
Later this year, but well before January 1, 2026, employers should begin to prepare for this significant operational change to their Retirement Plan and corresponding payroll process.
- Employers must contact their payroll provider to determine what is being done to be ready for this Roth catch-up requirement. If changing payroll providers, there should be discussion about how the new payroll provider will determine which employees are “highly paid”.
- Employers need to pay attention to information from the Plan’s recordkeeper about changes that it will be making because of this new requirement.
Please reach out to ACSI to learn more about this topic or to discuss any other issues with the operational compliance for your Retirement Plan.
