Section 603 of the SECURE 2.0 Act introduces a significant change to how catch-up contributions are handled for certain high-income individuals participating in qualified retirement plans (e.g., 401(k), 403(b), and governmental 457(b) plans). Specifically, beginning January 1, 2026, employees aged 50 or older whose FICA wages exceeded $145,000 (indexed annually) in the prior calendar year – who choose to make catch-up contributions – must do so on a Roth basis.
Originally enacted on December 29, 2022, the SECURE 2.0 Act (Setting Every Community Up for Retirement Enhancement 2.0) was designed to encourage greater retirement saving, expand access to retirement plans, simplify administrative rules, and provide more flexibility in distributions and contributions. It built on the original SECURE Act by adding many new provisions – over 90 – with staggered effective dates. The IRS previously provided a two-year administrative transition period for this provision, which expires at the end of 2025. The goal was to allow plans to update documents and payroll systems to account for this change properly.
Catch-up contributions by affected employees (based on age and income) must be Roth going forward. Any amount deferred under the IRC §402(g) limit ($23,500 for 2025) may continue to be made as pre-tax deferrals. We expect the current wage limit of $145,000 to be updated when the 2026 Cost-of-Living Adjustments (COLA) limits are announced mid-fourth quarter.
Employers that allow highly paid individuals to make catch-up contributions must ensure their retirement plans offer a Roth contribution option. If a plan does not provide for Roth contributions, high-income employees will be barred from making catch-up contributions. This provision does not affect anyone who earns under the $145,000 income threshold.
The $145,000 threshold is based solely on FICA wages from the current employer and is not prorated or aggregated across multiple employers. There is also no calculation for short earnings years or combining earnings from different companies under the same umbrella. What is reported on the prior year W-2 for each company is the number that will be used to determine how catch-up contributions are made to that company's plan. Owners whose income is reported on a K-1 are not subject to this provision.
Further, the plan cannot require that all catch-up contributions be Roth. If the plan allows for catch-up contributions, and the participant is below the income threshold, they may continue to make those extra contributions on a pre-tax basis. Higher paid individuals may prefer lowering their current-year taxable income over waiting several years for tax-free Roth benefits.
Important Notes for Employer Plan Sponsors
If you are an employer plan sponsor, consider these action items.
Plan Amendments: If your plan does not currently permit Roth contributions, you must amend the plan document to enable Roth catch-up contributions for highly paid individuals. Any amendment must be executed no later than December 31, 2026.
Payroll System Updates: Systems must be able to identify impacted employees and apply the correct tax treatment. If you are unsure, contact your payroll provider now to confirm they are ready for the change effective January 1, 2026.
Participant Communication: It is essential to inform affected employees of the change and provide tools for managing their elections. If the participant has elected deferrals to be pre-tax, they must be allowed to stop any catch-up contributions by making an affirmative election. If they fail to make that election, the employer can deduct the deferrals as Roth contributions.
AGH is committed to providing employers, plan sponsors, and their providers with relevant information and guidance.