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Takeaways
- Generally, plan sponsors should be prepared to implement the Roth catch-up rule for taxable years beginning after December 31, 2025 (i.e., January 1, 2026, for calendar year plans). This will require coordination with ERISA counsel, the company's payroll provider, and the plan's recordkeeper and third-party administrator.
- Be prepared to discover mistakes and correct them quickly.
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On September 16, 2025, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued Final Regulations (Treasury Decision 10033) under Section 603 of the SECURE 2.0 Act. Section 603, as enacted, generally requires that catch-up-eligible participants whose prior-year FICA wages exceeded $145,000 (as indexed) make all catch-up contributions as designated Roth contributions for taxable years beginning after December 31, 2023. However, in Notice 2023-62, the IRS provided an administrative transition period for calendar years 2024 and 2025, during which plans could continue to accept pre-tax catch-up contributions without violating the statute. The Final Regulations confirm this transition relief remains in effect only through December 31, 2025, and clarify that full compliance with the mandatory Roth catch-up rule is required for taxable years beginning after December 31, 2025 (i.e., January 1, 2026, for calendar-year plans). The Final Regulations generally apply to taxable years beginning after December 31, 2026, with 2026 administration permitted under a reasonable, good-faith interpretation. Finally, note that the regulations also provide delayed applicability for collectively bargained plans.
This article focuses on the impact of the Final Regulations on non-collectively bargained and non-governmental 401(k) plans.
Mandatory Roth Catch-Up Rule
The Roth catch-up rule requires that any catch-up eligible participant (i.e., any participant who is or will reach age 50 by the end of the taxable year) whose FICA wages for the preceding calendar year exceed $145,000 (as indexed) must designate all catch-up contributions as Roth contributions. All catch-up eligible participants must be allowed to designate their catch-up contributions as Roth, but the Final Regulations make clear that a plan cannot require that all catch-up eligible participants designate catch-up contributions as Roth if they do not exceed the wage threshold. If a plan does not have a designated Roth program, participants subject to the Roth catch-up rule may not make catch-up contributions.
Determining Who is Subject to the Roth Catch-Up Rule
The Final Regulations clarify that a plan determines whether a participant satisfies the $145,000 (as indexed) threshold by using the FICA wages reflected in Box 3 of the participant's Form W-2 for the prior year from the participant's common law employer. In certain situations, FICA wages from multiple employers may be aggregated. For example, in the calendar year of an asset purchase, a successor employer may aggregate the wages of a predecessor employer under the successor-predecessor rules.
Administrative Issues Implementing the Roth Catch-Up Rule
Plans may provide for deemed elections with respect to catch-up contributions. Participants who are subject to the Roth catch-up rule, and have elected to make catch-up contributions, are "deemed" to have elected to designate those contributions as Roth. To implement deemed elections, participants must have an effective opportunity to decide not to make catch-up contributions. The deemed election may apply either when pre-tax contributions reach the 402(g) limit or when combined pre-tax and Roth contributions reach that limit, which is helpful for plans that provide the spillover method. The deemed election must end within a reasonable time after the participant is no longer subject to the Roth catch-up rule, or when an amended Form W-2 shows that the participant does not satisfy the threshold.
Correction Methods for Mandatory Roth Catch-Up Failures
Mistakes are bound to happen as plans work through the complexities of implementing the Roth catch-up rule. The Final Regulations provide two correction methods plans may use to correct Roth catch-up failures. As a condition of using the correction methods, plans must have adopted practices and procedures reasonably designed to ensure compliance with the mandatory Roth catch-up rule and must provide for deemed elections. The same correction method must be used for similarly situated participants, and the method used cannot be based on a participant's investment gains.
The regulations discuss two correction methods: a W-2 correction method and an In-Plan-Roth Rollover method. Both options have unique challenges and advantages. Plan sponsors should consult their ERISA counsel to discuss their best options.
The regulations also allow for no correction in certain circumstances. Correction is not required if the amount of the pre-tax catch-up contribution that should have been designated as a Roth contribution does not exceed $250 (not including earnings or losses). Or if the failure is due to an amended Form W-2, reflecting that the participant was subject to the Roth catch-up rule, is filed or provided after the correction deadline.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
