Preparing For Roth Catch-up Contributions

Starting soon, higher-income employees who make catch-up contributions will see a major change in how those contributions are handled. Under Section 603 of the SECURE 2.0 Act of 2022, catch-up contributions for certain higher-earning participants must be made on a Roth (after-tax) basis rather than pre-tax.

After a two-year administrative delay, this requirement takes effect January 1, 2026. The IRS and Treasury issued final regulations on September 15, 2025, which become effective in 2027. For 2026, plans must follow a reasonable, good-faith interpretation of the statute.

Here’s an overview of how the rule works and how plan sponsors can prepare for compliance.

Understanding the Roth Catch-Up Rule

Currently, participants age 50 and older can make additional “catch-up” contributions to a qualified retirement plan—up to $7,500 in 2025 (indexed for inflation; the amount increases to $8,000 in 2026). Under the new rule, if an eligible participant earned more than $150,000 (also indexed for inflation) in FICA wages in the previous calendar year, those catch-up contributions must be Roth—made with after-tax dollars.

This requirement applies to 401(k), 403(b), and governmental 457(b) plans, but not to SIMPLE or SEP IRAs. The change is designed to accelerate tax revenue by moving high-earners’ catch-up deferrals from pre-tax to after-tax treatment.

If a plan does not offer a Roth feature, affected participants will be unable to make any catch-up contributions once the rule takes effect. That means plan sponsors without Roth capability will need to act quickly to add one.

Key Dates and Compliance Timeline

• 2026 – Plans must comply using a reasonable, good-faith interpretation of Section 603.
• December 31, 2026 – Deadline for adopting plan amendments to incorporate Section 603 provisions for most non-governmental, calendar-year plans.
• 2027 – The IRS final regulations become fully effective.

Although 2026 is technically a transition year, plans must be operationally ready well in advance. Errors in coding or missed Roth setups could trigger costly corrections and frustrated participants.

Four Key Action Steps for Plan Sponsors

1. Review and Amend the Plan Document.

Start by confirming your plan allows Roth contributions and catch-up contributions. If it doesn’t, you’ll need to adopt an amendment to add the Roth feature and align your plan language with Section 603.

2. Coordinate With Your Recordkeeper and Payroll Provider.

Recordkeeping systems and payroll integration will be critical. Recordkeeping and payroll systems must:

• Identify employees whose prior-year FICA wages exceed $150,000
• Automatically direct their catch-up contributions to the Roth source
• Prevent pre-tax catch-up contributions for those employees

If you work with multiple payroll systems or employ workers across related entities, ensure each system can aggregate wages correctly for compliance purposes.

3. Develop a Participant Communication Plan.

Many employees will be surprised to learn that their catch-up contributions must now be Roth. For high earners accustomed to the pre-tax deduction, this change will reduce take-home pay. Plan sponsors should:

• Notify participants early—ideally during open enrollment or year-end meetings.
• Explain that the rule applies only to those earning above the $150,000 threshold in the prior year.
• Clarify that while the immediate tax benefit is gone, Roth contributions grow tax-free and can be withdrawn tax-free in retirement (subject to IRS rules). In addition, it will potentially reduce Required Minimum Distributions (RMDs) later.
• Encourage participants to review or update their deferral elections accordingly.

Tailored communication will be especially important for employees hovering near the threshold, as they may not know whether they qualify until the new year.

4. Work With Your Retirement Plan Advisor.

Your advisor can play a central role in guiding this transition. A knowledgeable plan advisor can:

• Review your plan’s design and amendment needs to ensure Roth catch-up compliance.
• Coordinate with recordkeepers and payroll providers to test processes and prevent administrative errors.
• Assist with participant education—explaining Roth taxation, withdrawal rules, and long-term benefits.
• Help create communication templates and notices that meet ERISA disclosure requirements.
• Document your good-faith compliance steps for 2026 in case of audit or DOL inquiry.

Other Implementation Considerations

• Plan design choices. Some employers may wish to simplify administration by making all catch-up contributions Roth. While this can be allowed, the plan must still comply with the statutory requirement and cannot force Roth treatment on lower-earning participants who don’t meet the threshold.
• Correction procedures. If a participant’s catch-up is incorrectly classified as pre-tax, correction options include a Form W-2 amendment or in-plan Roth rollover, depending on your provider’s capabilities.
• Super catch-up coordination. SECURE 2.0 also allows larger catch-ups for ages 60–63, which became effective in 2025. Those additional contributions will likewise be Roth-only for high earners.
• Recordkeeping precision. Payroll and plan data must be synchronized. The $150,000 threshold is based on FICA wages (W-2, Box 3), not total compensation or plan-eligible pay.
• Employee relations. Consider educational webinars, onsite workshops, and FAQ documents to help participants understand the change and its tax implications. Many will appreciate that Roth catch-ups provide future tax-free withdrawals and are not subject to Required Minimum Distributions (RMDs) when they turn 73.

Documenting Good-Faith Compliance

During 2026, the IRS will expect plan sponsors to show they made reasonable efforts to interpret and apply Section 603. That means:

• Maintaining written documentation of payroll and recordkeeper coordination,
• Retaining testing or validation reports,
• Keeping copies of employee notices and election forms, and
• Recording advisor recommendations and implementation timelines.

Good-faith compliance won’t excuse neglect, but it does protect sponsors who act diligently while systems and providers finalize updates.

Final Thoughts

The Roth catch-up requirement affects a relatively small segment of your workforce—but it carries big operational consequences if you’re unprepared. The transition touches many areas of plan administration, including document language, payroll coding, recordkeeping, and employee communication.

By taking the necessary steps as early as possible, you’ll meet the 2026 good-faith standard and ensure full compliance once the final regulations take effect in 2027. More importantly, you’ll help your high-earning employees stay on track toward their retirement goals—without interruption or confusion.