THE ROTH CATCH-UP MANDATE IS COMING FOR YOUR 401(K) PLAN

Come 2026, PEOs will have a unique opportunity to further demonstrate their worth as an HR provider that sits at the crossroads of payroll and benefits. A new mandate for 401(k) plans that was created by the SECURE 2.0 Act and that takes effect next year – the Roth catch-up requirement – will require careful payroll programming, employee communication, and coordination with your 401(k) provider.

WHO IS ROTH, AND WHY IS HE IN MY 401(K) PLAN?

An employer can offer employees the opportunity to make their elective deferrals to a 401(k) plan on a Roth basis, meaning that the employee does not receive an exclusion from income when the contributions are made to the plan, but (if the distribution meets certain requirements) the contributions and earnings are tax free when distributed from the plan. These contributions are named after the late William Roth, the last Republican Senator elected from Delaware, who found a pretty neat way to ensure his immortality by having the original Roth IRA named after himself. Roth contributions are typically better for employees who expect their tax rate to be higher in retirement when the funds are distributed.

Beginning at age 50, employees can make “catch-up contributions.” For example, in 2025, the normal elective deferral limit is $23,500, but an employee who is age 50 or older can make an additional $7,500 in elective deferrals to a 401(k) plan. Until the Roth catch-up requirement takes effect, employees can decide to make their elective deferrals, both the normal contributions and the catch-up contributions, on either a pre-tax or Roth basis. (Assuming the plan allows Roth contributions, which nowadays most do.)

PAYING FOR SECURE 2.0 ON THE BACK OF SENATOR ROTH

SECURE 2.0 was an expensive bill for Congress because of all the additional tax-preferred savings it generates, so to offset the cost Congress included what we call revenue raisers—and one of the biggest was the Roth catch-up requirement. Under this rule, a participant in a 401(k) plan must make catch-up contributions on a Roth basis and may no longer choose to do so on a pre-tax basis. However, this requirement is limited to a participant whose wages for the preceding calendar year exceed $145,000. (The $145,000 amount is indexed in future years.)

Example 1: Assume Trey A. participates in the Phish, Inc. 401(k) Plan, and is eligible to make catch-up contributions. Assume his wages from Phish, Inc. in 2025 were $200,000. In 2026, he can make his normal contributions of $23,500 (or whatever the limit is in 2026) on a pre-tax or Roth basis. But he must make any catch-up contributions above that on a Roth basis.

Example 2: Mike G. also participates in the Phish Inc. 401(k) Plan, but in 2025 his wages were only $130,000. In 2026, he can make both his normal contributions and any catch-up contributions on a pre-tax or Roth basis – it’s his choice.

HEY MAN, IT’S HARDER THAN IT SOUNDS, SO HIRE A PEO

While the new Roth catch-up requirement can be described fairly simply – or at least I tried to do so in the prior section – in practice this is going to be harder to administer than it sounds. That’s why PEOs are well positioned to help employers with compliance, because PEOs coordinate payroll and benefits so well.

Think for a minute how this needs to work. After the end of a calendar year, the employer needs to figure out which employees had wages in excess of $145,000 in the prior year. Wages for this purpose are based on the Form W-2 wages (more on that in a minute), and the final Form W-2 is often not sent until the end of January. For those employees who are over the limit, the payroll system must be programmed to prevent them from making pre-tax contributions in excess of the normal limit, and automatically switch them to Roth contributions during the year. This in turn is communicated to the 401(k) provider on the payroll feed as a Roth contribution for tracking purposes in the plan.

In some cases, the plan administrator might not know until after the end of the year which contributions are catch-up contributions. For example, if the plan fails its nondiscrimination testing, one correction is to recharacterize contributions as catch-up contributions, but this happens after the end of the year. It can get messy fast.

IRS GIVES US SOME BREATHING ROOM, AND NOW SOME GUIDANCE

Congress’ original deadline of 2024 to implement the Roth catch-up requirement was way too optimistic, so in August 2023, the IRS released Notice 2023-62, which provided an “administrative transition period” for 2024 and 2025. A normal person would just call this a delay. Meanwhile, the IRS began work on proposed regulations to fill in the gaps in the statute, and those proposed regulations were released in January 2025.

Although the regulations are only in proposed form at this time, they provide insight into how the IRS believes the Roth catch-up mandate will be administered. Importantly, the proposed regulations do not provide an extension of the Roth catch-up requirement. The regulations themselves generally are proposed to apply to contributions in taxable years that begin more than six months after final regulations are published, with a later date for collectively bargained plans, but the mandate itself is not delayed. Thus, it appears that unless the final regulations are issued very quickly, or unless the IRS provides another extension (which officials have said will not happen), the Roth catch-up requirement will apply in 2026, but the guidance in the proposed regulation is essentially optional for now.

Here are some of the key takeaways in the proposed regulation (there is lots more detail but it would easily consume the entire issue of PEO Insider®, so call your ERISA lawyer for more info):

1. In a PEO relationship, the key employer for purposes of determining wages is the “common law employer” even if the common law employer has contracted with a PEO or similar third party payor.
2. Wages for purposes of the Roth catch-up requirement are determined by reference to the FICA taxes imposed by Internal Revenue Code sections 3101(a) and 3111(a), which is the Social Security tax (Box 3 on Form W-2).
3. An individual who does not have FICA wages from the employer sponsoring the plan for the preceding calendar year (or whose FICA wages are at or under the $145,000 threshold) is not subject to the Roth catch-up mandate.  This includes partners with only self-employment income subject to SECA taxes – those individuals are treated as having $0 wages and thus are not subject to the mandate.
4. A plan does not aggregate FICA wages from multiple common law employers that paid wages to the same employee in a year.
5. The proposed regulations would allow a plan to include a “deemed” Roth election under which an employee who has elected to make catch-up contributions would be deemed to elect to do so as Roth if the Roth catch-up requirement applies.
6. The proposed regulations include methods to correct errors in administering the Roth catch-up requirement, for example, when an employer allows a participant who is subject to the Roth catch-up requirement to contribute catch-up contributions on a pre-tax basis.
7. If a participant is subject to the Roth catch-up requirement and is eligible for the new “super” catch-up rule allowing even higher catch-up contributions when they are ages 60-63, then the Roth mandate requirement also applies to those enhanced contributions.

GETTING READY FOR 2026

If you have not already done so, now is the time to make sure that your payroll system is going to be ready to implement this new requirement in 2026, including quickly identifying employees subject to the requirement in early 2026 based on 2025 wages. By the way, if your 401(k) plan does not have a Roth contribution feature yet, it’s time to add it. (While technically not required, if the plan does not offer Roth, then higher-paid employees cannot make catch-up contributions. And the higher-paid employees are also the complainers, right?) Finally, this will all be new to employees, and those who are in higher tax brackets may not be pleased to find out they now must make their catch-up contributions on an after-tax basis. Rolling out communications well in advance of 2026 is highly recommended.

This article is designed to give general and timely information about the subjects covered. It is not intended as legal advice or assistance with individual problems. Readers should consult competent counsel of their own choosing about how the matters relate to their own affairs.