- November 14, 2025
Some may wonder why we have chosen to devote even more time to this, our third newsletter article that considers the new Roth catch-up rules. The answer is simple. This new development has the potential to directly impact the operation of practically every 401(k) plan in existence. Further, the rules are not intuitive. Consequently, any plan sponsor that fails to prepare for this rule change is likely to end up with compliance problems that could have easily been avoided.
As most of you already know, section 414(v) of the Internal Revenue Code of 1986, as amended (“Code”), grants plan sponsors the discretion to allow retirement plan participants aged 50 or over to annually defer an extra amount into certain types of retirement plans. This extra deferral amount is commonly referred to as a catch-up and is indexed for inflation. However, certain provisions of the retirement plan legislation commonly referred to as SECURE 2.0 implemented an additional requirement that applies to catch-ups.
More specifically, individuals earning over $150,000[1] in FICA wages, indexed for inflation, during the prior year (“High Earners”) are only allowed to make catch-up contributions on a Roth basis for the current year (“Mandatory Roth Catch-Ups”). This change takes effect in 2026. As an example, someone who earned over $150,000 in FICA wages for 2025 would be subject to the Mandatory Roth Catch-Up rule for 2026.
In practice, the implementation of Mandatory Roth Catch-Ups means that a plan must allow for Roth deferrals in order for High Earners to make catch-up contributions. If a Plan does not allow for Roth contributions, it could still allow pre-tax catch-ups for non-High Earners but it would not be able to allow High Earners to make any catch-ups whatsoever.
With respect a High Earner’s consent to making his or her catch-up contribution as a Roth contribution, the IRS has indicated that plan sponsors may deem High Earners to have irrevocably designated any catch-up to be a Roth catch-up. However, if a plan sponsor provides for this deemed election, it must still offer the High Earner an effective opportunity to make an election other than the deemed election. In other words, the plan sponsor must allow the High Earner to elect not to make any catch-up contributions at all rather than making Mandatory Roth Catch-Ups.
As mentioned above, it is important to note that the measuring stick for determining whether someone qualifies as a High Earner is their prior year FICA wages as reported in Box 3 of an individual’s W-2. This means that any individual without any FICA wages from the plan sponsor for the prior year could not be a High Earner subject to Mandatory Roth Catch-Ups. Further, the High Earner wage threshold is not pro-rated for an individual’s initial year of employment. Therefore, an individual who worked for his employer for only part of the preceding calendar year would still need to earn wages that exceeded the full High Earner dollar threshold for that calendar year to be considered a High Earner.
The IRS has also stated that the High Earner dollar threshold is determined exclusively by reviewing the FICA wages received by the individual from the “employer sponsoring the plan”. For this purpose, the “employer sponsoring the plan” is defined as the individual’s common law employer and does not include wages received from “related employers” as determined under the controlled group and/or affiliated service group rules (“Related Employers”). Thus, in a situation where multiple Related Employers participate in the same plan and a single employee receives FICA wages from more than one of such Related Employers, the determination of whether or not such individual was a High Earner would be calculated independently for each separate entity without aggregating wages from each entity. Notwithstanding this distinction, the IRS has indicated that Plan sponsors are permitted to voluntarily aggregate the FICA wages earned by an individual in connection with Related Employers if it wishes. This flexibility was granted in order to provide some administrative convenience to plan sponsors should the choose to operate the rule in this manner
Proper implementation of Mandatory Roth Catch-Ups requires plan sponsors to careful coordinate plan operations with, primarily, their payroll provider and their recordkeeper. Thus, we strongly recommend that every plan sponsor reach out to those entities now before the Mandatory Roth Catch-Up rules become effective in 2026 in order to ensure that the transition to complying with this new rule goes as smoothly as possible.
We hope that this article helped you to better understand these topics and encourages plan sponsors to begin to investigate what must be done to comply with the new rules. However, please be advised that this article is not intended to serve as financial, tax or legal advice so it should not be construed as such. If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional. For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.
[1] SECURE 2.0 established this dollar threshold at $145,000. However, the cost of living (“COLA”) adjustments published by the Internal Revenue Service on November 13, 2025 increased this dollar threshold to $150,000.