Pursuant to the SECURE 2.0 Act, highly paid individuals (HPIs) enrolled in a retirement plan (whether it be a 401(k) plan, a 403(b) plan, or a governmental 457(b) plan) with W-2 compensation, i.e., wages that are subject to Federal Insurance Contributions Act (FICA) as reflected in Box 3 on a Form W-2, that exceeds $145,000 for the preceding year, are now required to make their catch-up contributions on a Roth after-tax basis. This means that individuals with FICA wages that exceed $145,000 no longer have a choice to make their catch-up contributions on either a pre-tax and/or a Roth after-tax basis.
It is worth noting that an HPI is different from a highly compensated employee (HCE) for retirement plan purposes. An HCE, as that term is defined for various retirement plan nondiscrimination and minimum coverage rules, is an employee who (i) earns more than $160,000 in compensation or (ii) is a greater than 5% owner.
This provision was intended to be a revenue raiser for the SECURE 2.0 Act as a whole, as it requires all catch-up contributions made by these select individuals to move from a pre-tax basis to a Roth after-tax basis. Originally, this mandatory Roth contribution requirement was set to take effect as of January 1, 2024. However, pursuant to IRS Notice 2023-62, due to its administrative complexity, this provision was postponed by the IRS until January 1, 2026.
Understanding the Changes
On January 13, 2025, the IRS issued proposed regulations that address the new Roth catch-up contribution requirement as it applies to HPIs with FICA wages that exceed $145,000. The two most noteworthy takeaways from these proposed regulations, as to this upcoming change in the law which becomes effective for tax years beginning on or after January 1, 2026, are as follows:
- Consideration of certain plan amendments: For plan sponsors (that currently do not offer a Roth contribution option within their plan but wish to offer their HPIs the option to continue to make catch-up contributions to the plan), the plan will have to be amended prior to January 1, 2026, to add a Roth contribution feature for all employees. Furthermore, for plans that are subject to 401(k) nondiscrimination testing, plan sponsors may want to consider amending their plan prior to January 1, 2026, to add a Roth In-Plan Conversion Feature as to all 401(k) pre-tax contributions. Adding this feature to 401(k) pre-tax catch-up contributions will allow these contributions to be converted to Roth catch-up contributions as needed to help the plan pass the 401(k)-nondiscrimination test.
- HPI compensation must be subject to FICA: Participants with no FICA wages (i.e., partners who only have self-employment income) are not subject to the mandatory Roth catch-up contribution rules.
What Are “Super Catch-Up Contributions”?
The proposed regulations also address the “super catch-up contribution rule” that became effective for taxable years beginning after December 31, 2024. This rule allows participants between the ages of 60 and 63 to make “super catch-up contributions” to a plan in an amount up to the greater of $10,000 or 150% of the regular catch-up contribution limit.
In this instance, a participant will not be eligible to make a super catch-up contribution in the year in which they turn 64 years of age. For 2025, the regular contribution limit is $7,500 and the super catch-up contribution amount (which can be either pre-tax and/or Roth) is $11,250. The proposed regulations state that if a plan sponsor already allows for catch-up contributions within its plan, this is enough to include the new super catch-up contribution rule. To reiterate, beginning in 2026, all catch-up contributions (whether “regular” or “super”) for HPIs must be on a Roth after-tax basis.
Next Steps for Plans Without a Roth Feature & Others
While the proposed regulations provide much-needed guidance as to the above referenced catch-up contribution rules, the observation and the implementation of these rules will be a complex undertaking for plan sponsors, TPAs, and record-keepers alike.
For plan sponsors who do not currently offer Roth contributions in their plan and want to satisfy their HPIs, they will need to amend their plan accordingly prior to January 1, 2026 to add a Roth feature for all plan participants. Furthermore, any 401(k) plan that is subject to 401(k) nondiscrimination testing may want to consider adding a Roth in-plan conversion feature to their plan with respect to pre-tax 401(k) contributions as outlined above, to provide additional flexibility in assisting it with passing the 401(k) nondiscrimination test.
These amendments (as applicable) should be completed as soon as possible and shared with the plan sponsor’s record-keeper to allow for sufficient time to prepare the record-keeping system. This change in the law, as well as to the plan, must also be properly communicated to all participants. Communication of this change can be reflected within the annual safe harbor notice (if applicable) and/or via a short summary of material modifications.
Next Steps for Plans With a Roth Feature
Plan sponsors that already offer a Roth feature are encouraged to properly communicate this change in the law to all plan participants, even though no amendment to the plan is required. In addition to providing any such amendments to your plan’s record-keeper, it is important to confirm that your payroll system is equipped to address this change in the law.
How Forvis Mazars Can Help
We stand ready to answer any questions you may have regarding these new Roth contribution rules (that become effective in 2026), as well as the new super catch-up contribution rules (that are already effective in 2025). Moreover, the Retirement Plan Consulting team at Forvis Mazars is happy to help you prepare plan amendments and/or notices that may be required to apply and communicate these changes in the law to your employees. For any questions on this or other retirement plan needs, please reach out to a professional at Forvis Mazars.