Employer Alert: Is Your Retirement Plan Ready for Mandatory Roth Catch-Up Contributions?

To balance the budget, SECURE 2.0 Section 603 added a requirement that catch-up contributions for certain “high earners” must be designated Roth, rather than pre-tax. For plans that already permit Roth contributions, these “high earners” can continue to make catch-up contributions, but the real pain point for plan administrators has been figuring out how to flip the switch in payroll to designate these particular dollars as Roth. For plans that do not already permit Roth contributions, plan sponsors are not required to add Roth, but if they do not, effective January 1, 2026, “high earners” will be unable to make catch-up contributions.

While it may not deliver a magic bullet for all payroll systems, the IRS has finally issued final guidance for plan administrators to implement and comply with the Roth catch-up contribution requirement. To that end, let’s unpack some common questions:

1. Do we have to implement Roth catch-ups for “high earners” by January 1, 2026? Yes. The final regulations do not extend the transition period for this requirement. You do have some time to comply with the final regulations, though. In 2026, good faith compliance with the final regulations is sufficient. You must comply with the final regulations, the IRS’s interpretation of SECURE 2.0 Section 603, by the plan year beginning January 1, 2027. Collectively bargained and governmental employers have more time to comply with the final regulations.
   
   
2. Which plans must comply? SECURE 2.0 Section 603 applies to 401(k), 403(b) and governmental 457(b) plans. (It applies to SEPs and SIMPLE IRAs too.)
   
   These final regulations amend the 401(k) and 403(b) regulations to permit deemed Roth catch-up elections (see Question 4). The 457(b) regulations, which have not been finalized, will be updated to address these rules at a later date (we hope).
   
   
3. Who is a “high earner”? A “high earner” is an individual with FICA wages of $145,000 (indexed) or more in the previous year. To determine whether the individual had FICA wages of at least $145,000 in the prior year, a plan may, but is not required to, aggregate wages for one or more employers using a common paymaster or within a controlled group.
   
   If the individual did not have FICA wages (e.g., self-employed individual issued a K-1) then the individual is not subject to the Roth catch-up requirement. Be careful, though; an individual who changed status mid-year (e.g., became a partner effective July 1, 2025) may have sufficient FICA wages in 2025 to be subject to the requirement in 2026.
   
   
4. How can we implement this requirement? To implement this requirement, the final regulations say plan administrators can (but are not required to) “deem” catch-up contributions for “high earners” to be Roth. Meaning, that a “high earner” is deemed to have irrevocably designated any catch-up contributions as designated Roth contributions. If the plan does not implement “deemed Roth” catch-up contributions (i.e., goes the “non-deemed route”) then the “high earner” can only make catch-up contributions if the participant has an affirmative Roth election in place.
   
   You can apply the “deemed Roth” designation to spill-over contributions – meaning, once the participant hits the applicable limit, then the excess (catch-up) is designated Roth.
   
   If your payroll system can’t flip the switch at the time the participant hits the limit, then you have another option – the final regulations say you can apply the “deemed Roth” designation to separate catch-up elections. When a participant is permitted under the plan to make a separate election to treat a portion of elective deferrals during each payroll as catch-up without regard to whether the participant has reached a limit (a separate election plan), those elected catch-up contributions can be deemed Roth. A separate election plan is not required to recharacterize deemed Roth catch-up contributions as pre-tax if the participant does not actually reach an applicable limit.
   

   For either option, communication to the impacted “high earners” will be key. Remember, there are benefits to Roth and participants always have the option to stop deferrals.

5. What can we do if there’s an error? For plans that implement “deemed Roth,” if a “high earner” makes a pre-tax catch-up contribution, the final regulations permit a plan to correct the error using two new methods: (1) Form W-2 Correction Method, or (2) In-Plan Roth Rollover (Transfer) Correction Method. Under the Form W-2 Correction Method, the plan would report the contribution as a designated Roth contribution on the participant’s Form W-2 for the year of the deferral. You can’t use this method if the W-2 has already been filed or furnished. Under the In-Plan Roth Rollover Correction Method, the plan rolls over (transfers) the elective deferral (adjusted for allocable gain or loss) from the participant's pre-tax account to the participant's designated Roth account and reports it on Form 1099-R for the year of rollover (transfer).
   
   The plan must use the same correction method for all similarly situated participants in a given year, and deadlines to correct apply.

If you have any questions related to this alert or other employee benefits matters, please reach out to a member of our Benefits Team or your regular Smith Anderson attorney.