New Roth Catch-Up Rules For 401(k) Plan Participants

Tax News You Can Use | For Professional Advisors

 

David M. Barral, Senior Wealth Advisor,
Paul Scrocco, Associate Wealth Advisor and
Jane G. Ditelberg, Director of Tax Planning

 

December 15, 2025

The passage of the SECURE 2.0 Act in 2022 brought many changes to the retirement landscape. One of the most notable changes was the treatment of catch-up contributions that participants over age 50 may make to qualified retirement plans. These changes have added complexity for many retirement plan administrators, who must adopt changes to not only their plan documents but also to payroll processes and employee notices. Furthermore, these changes directly impact certain individual taxpayers — specifically “higher earners” — who will need to adapt to the changes in their own retirement planning. In this article, we dive into the workings of this new provision and what the implications for high earning plan participants will be going forward.

Rules Prior to SECURE 2.0 Act

An individual may elect to defer some of their wages annually into a retirement plan through their employer (e.g., to a 401(k) plan). That deferral could be as much as $24,500 in 2026. Traditional 401(k) plan contributions are excluded from the employee’s income in the year of contribution, while proceeds — including the original contributions and any accumulated income and growth in value — are taxed upon withdrawal from the plan. In contrast, contributions to a Roth account are not deductible by the employee at the outset, but the contributions and any accumulated income and growth in value are tax-free when withdrawn.

In addition, individuals who will attain age 50 by the end of the taxable year are permitted to make additional annual catch-up contributions of $8,000 in 2026. When combining the regular elective deferral amount and the annual catch-up amount, an individual taxpayer 50 or older can defer as much as $32,500 annually into a retirement plan. Under the old rules, participants of the appropriate age could reduce their taxable wages if the catch-up was made pre-tax (to a traditional account), or they could choose an after-tax catch-up (to a Roth account) for tax-free withdrawals in the future: This choice was available regardless of income level.

New Rules

The SECURE 2.0 Act introduced two major changes to catch-up contributions for retirement plans, which were designed to incentivize increased savings by those approaching retirement and to raise tax revenue by altering the tax treatment of catch-up contributions for top earners.

High Earners Must Make Catch-Up Contributions to a Roth

The first notable change was to require that catch-up contributions be treated as Roth contributions if the employee meets certain wage thresholds. As specified in the original Secure 2.0 Act legislation, if an individual’s prior-year wages from the employer sponsoring the plan exceeded $145,000, catch-up contributions would be permitted only if they are designated Roth contributions and made pursuant to an employee election. In other words, high-income employees aged 50 or older will no longer have the option to make their catch-up contributions on a pre-tax basis. In contrast, employees earning less than the threshold are not subject to this rule and can continue to choose between traditional or Roth accounts for their catch-up contributions.

The original $145,000 wage limit adjusts annually for inflation. The IRS announced the 2026 inflation adjustments in November 2025, providing that, in 2026, if wages from the prior year (2025) exceed $150,000, catch-up contributions must be designated as Roth contributions. The law defines the threshold based on wages subject to FICA (box 3 of Form W-2) from the employer sponsoring the plan. FICA wages are those subject to Social Security and Medicare tax withholding. For individuals with multiple jobs or a change in employer, the rule applies separately per employer. In general, many deductions and credits in tax law are based on a taxpayer’s adjusted gross income (AGI); however, this is not based on AGI but on the prior year’s wages from that employer. Therefore, a new employee who has no prior year wages with their employer should not be subject to the rule in the first year of hire. It is important to note that a plan is permitted to aggregate wages from related companies in a controlled group for purposes of simplicity, which could push the employee over the wage threshold.

Super Catch-Up Contributions

The second change was the introduction of the increased catch-up limit for certain older individuals. Starting in 2025, individuals who attain the ages of 60, 61, 62, or 63 during the year may make a “super catch-up” contribution. For example, if John is age 62 in 2026, he would be able to make a catch-up contribution of $11,250, rather than the standard $8,000 limit for catch-up contributions for other plan participants. The law also indexes these enhanced limits for inflation going forward, allowing older individuals a greater ability to fund their retirement accounts. Once the participant reaches age 64, however, the lower standard catch-up contribution limit of $8,000 would apply. Furthermore, these super catch-up amounts will also be subject to the Roth contribution requirement if the individual’s wages exceed the threshold.

What Retirement Plans Are Subject to This Rule?

The requirement that certain deferrals must be Roth contributions applies to applicable employer plans such as 401(k)s, 403(b)s, and 457 plans. This rule does not apply to traditional IRA catch-up contributions.

Adoption and Implementation for Employers and Plan Administrators 

The Roth catch-up requirement was initially set to begin in 2024, but, due to a drafting error in the law and the confusion that followed, the IRS provided an “administrative transition period.” This delayed the Roth catch-up requirement until after 2025. This was a welcome relief as it gave many employers and plan administrators more time to adjust their systems and amend plan documents to provide a Roth option for employees. Employees will have to be informed about these changes to their plan. However, beginning January 1, 2026, the new rules are fully in effect.

Deemed Roth Catch-Up Election

To facilitate compliance with the Roth catch-up requirement, an employer may adopt a deemed Roth catch-up election. Any employee subject to the Roth catch-up requirement will automatically have their catch-up contribution designated as Roth contributions if an employer adopts this provision. This deemed election is also conditioned on the employee having an effective opportunity to make a new election that is different from the deemed election. Alternatively, if there is not a deemed Roth catch-up election implemented, an employee will have to affirmatively make a new election for their catch-up contributions to be designated as Roth contributions. Employees should inquire with their company about whether the company plans to implement deemed Roth catch-up elections.

Plans Without a Roth 401(k) Option

Even though plans were given time during this administrative transition period to add a Roth contribution program, it is completely optional to include a Roth 401(k) option. If an employer’s plan permits catch-up contributions but does not have a Roth 401(k) option, then any individuals subject to the Roth catch-up requirement will not be permitted to make any catch-up contributions to that plan.

Rules of Operation

Early year contributions designated as Roth contributions can count toward the Roth catch-up requirement. For example, Madeline starts off the 2026 year making Roth 401(k) contributions that totaled $10,000. She then switched to pre-tax contributions for the remainder of the year. If she is subject to the Roth catch-up requirement, the $10,000 she contributed earlier in the year can count as satisfying the requirement.

In addition, an in-plan Roth rollover that is elected voluntarily does not satisfy the Roth catch-up requirement. For example, Steve converts $25,000 of his pre-tax 401(k) within the plan to a Roth 401(k) in the plan (an “in-plan conversion”). The $25,000 that is now in his Roth 401(k) does not satisfy the Roth catch-up requirement because the amount of the in-plan conversion could be attributable to contributions other than his elective deferrals (e.g., a Traditional IRA rolled into his plan).

Planning Opportunities

Not all plan participants will be able or will want to make Roth contributions. This may be due to a plan that does not allow it, but it may also be for reasons such as a need to access the funds in fewer than five years. For those that find themselves in this situation, there are some planning opportunities.

• The first is to reduce wage income to below the limit. This might be done by electing to defer some compensation until after retirement by paying attention to the timing of bonus or overtime pay or by making payroll contributions into a health savings account (HSA) and/or a flexible spending account (FSA) for medical or childcare expenses — Also known as “cafeteria plans.” These payroll contributions can reduce one’s FICA wages, which, again, are the wages used for the Roth catch-up rule.
• A second option is to use an HSA as a 401(k) proxy. While FSAs have strict “use-it-or-lose-it provisions” to use all the money within the year or at least two and half months after year-end, HSAs can be invested and distributed at a later time for qualified medical expenses for an account owner under age 65. Distributions not made for medical expenses are generally subject to income tax and a 20% penalty. However, after the account beneficiary attains the age of 65, there is an exception to the 20% penalty and, therefore, a withdrawal can be spent in retirement on the same tax basis as traditional 401(k) contributions. For family coverage, an HSA can be as much as $8,750 in 2026. HSA contributions made via payroll deductions can reduce wages, whereas contributions made directly to the HSA can provide an income tax deduction when the return is filed. Note that there are other requirements for contributing to an HSA, such as enrolling in a high-deductible medical insurance plan, so it is vital to review this first.

Final Thoughts

Now that we are heading into year-end, it is a great time to review retirement plan elections for the new year. Employees should reach out to their human resources departments or their plan administrator to understand if a deemed Roth election will be in place or if they need to proactively plan to make a new election for next year. Depending on the facts and circumstances, individuals under the age of 50 who expect to have wages above the threshold may be more inclined to maximize pre-tax contributions now, knowing that future catch-up contributions may need to be made to a Roth account in the future.