Beginning January 1, 2026, certain higher-paid employees must make all catch-up contributions to their 401(k), 403(b), or 457(b) plan as Roth contributions (after-tax).
Who This Affects
- Highly Paid Individuals (HPIs) – employees who earned more than $145,000 in FICA wages in the previous year.
- Example: An employee earns $150,000 in 2025. In 2026, all catch-up contributions must be Roth.
- New hire exception – If you hire a director in July 2025 and pay them $85,000 that year, they are not an HPI in 2026.
- Annual updates – the $145,000 threshold will adjust each year for inflation.
Why This Matters for Payroll
- New tracking requirement – Payroll must now track the HPI threshold based on FICA wages.
- Multiple moving parts – If you’ve adopted the enhanced catch-up (ages 60–63), payroll will need to track both provisions – leading to four possible scenarios depending on the participant’s characteristics.
- Roth processing is required – For impacted participants, catch-up dollars must be withheld as Roth at the time of payroll deduction and coded correctly on payroll files.
From the Recordkeeper’s Perspective
Nothing changes in how Navia processes your contributions – we simply apply pre-tax or Roth amounts to the correct source in the plan. However, the money must come to us as Roth for HPIs’ catch-up contributions starting in 2026.
If Your Payroll System Can’t Accommodate
The IRS has approved two compliance workarounds:
- Reprocess as Roth – Back out pre-tax contributions and reprocess as Roth. If done after year-end, corrected W-2s may be required.
- In-plan Roth conversion – Convert the pre-tax catch-up portion to Roth inside the plan. Participant consent is not required for this correction. To use these methods, your plan must:
- Have documented practices and procedures to comply with the Roth catch-up rule.
- Include these correction methods in your plan document when you amend for SECURE 2.0 in 2026. No amendment is required now.
- Adopt a deemed Roth election provision.
If Your Plan Doesn’t Have Roth – Add It Now
While Roth is not legally required, 93% of plans already offer it. If your plan does not have a Roth feature, we recommend that you amend the plan to add it immediately. Without it:
- Impacted employees lose catch-up eligibility – Higher-paid employees would be unable to make any catch-up contributions.
- Possible nondiscrimination testing problems – Without Roth catch-up, you lose a tool that can help your plan pass NDT testing for highly compensated employees (HCEs).
If Your Plan Already Has Roth
- Roth catch-up must be available to all participants – Not just HPIs.
- Only catch-up for HPIs must be Roth – All other contributions can remain pre-tax if the participant chooses.
If You Think Catch-Up Is a Hassle, You’re Right
With SECURE 2.0’s provisions for enhanced catch-up and now catch-up as Roth, the catch-up provision has most likely become an administrative headache for payroll. You might contemplate removing it entirely if you think it’s more trouble than it’s worth. However, there are a couple of unintended consequences to consider:
Before contemplating a removal of it from your plan, keep the following issues in mind:
- Potential “plan cut-back” issue – Removing the catch-up provision could violate plan rules unless it’s rarely used (speak to your ERISA attorney first).
- Executive Dissatisfaction – The participants who are most likely to be impacted by this provision are your senior executive staff. Taking away a tool to save on their current taxes will probably not be received well.
What Plan Sponsors Should Do Now
- Review your plan document – Did you adopt the enhanced catch-up?
- Add Roth if you don’t have it – This takes time to implement both legally and operationally.
- Talk to your payroll provider – Are they prepared to process Roth catch-up for HPIs on January 1, 2026? How will they do it?
- Choose your compliance method – Payroll adjustments or in-plan Roth conversions.
- Educate your employees – Navia’s Retirement Group can provide materials to explain the change.
Need help preparing for SECURE 2.0?
Navia’s Retirement experts can walk you through your plan options, coordinate with payroll, and help you avoid compliance pitfalls. Contact us today to get started.