Beginning January 1, 2026, certain highly paid employees will be required to make their catch-up contributions on an after-tax Roth basis. This will require changes to the way that employers administer their plan, so it’s time to make sure the plan, payroll, and service providers are ready.
Who is Affected?
Starting in 2026, employees who earned more than a set amount of FICA wages (as reported in Box 3 of Form W-2) from the plan sponsor in the prior calendar year must have any catch-up contributions made on a Roth basis. (For the first year, this means 2025 wages.) The 2025 FICA wage threshold used to determine who is subject to this requirement in 2026 will be $150,000; however, this amount will be adjusted each year for cost-of-living changes. Individuals who do not receive FICA wages, such as partners or other self-employed individuals, are not currently subject to the mandatory Roth catch-up requirement.
What Employers Need to Do Now
Make Sure Your Plan Allows Roth Contributions – If your plan doesn’t currently offer Roth deferrals, you’ll need to add a Roth option before January 1, 2026, in order for employees to continue making catch-up contributions. If your plan doesn’t permit Roth deferrals, let us know right away so that we can get it added.
If you choose not to add Roth deferrals, we recommend that you amend your plan to remove the ability to make catch-up contributions for all employees. Note that in addition to reducing the deferral limit for all employees, the plan will lose the ability to reclassify failed ADP testing contributions as catch-up to prevent corrective distributions to the Highly Compensated Employees.
Coordinate With Your Payroll Provider – Make sure that your payroll provider can identify employees whose prior-year FICA wages exceed the set limit and confirm that their system can automatically designate catch-up contributions for those employees as Roth. You’ll want to confirm this now, so that you know it is in place for 2026.
Advise Affected Employees – If an employee is subject to the mandatory Roth catch-up rule, the plan can automatically treat the employee’s deferral election that applies to catch-ups as a Roth election, even if the employee originally elected pre-tax. However, the plan must give employees an “effective opportunity” to make a different choice, such as opting out of catch-up contributions altogether or changing future elections. Employees who may potentially be affected by this requirement should be notified in advance.
Will Corrections Be Required if Affected Employees Make Non-Roth Catch-Ups?
Yes, IRS regulations outline several ways to correct errors when an employee who is subject to the mandatory Roth catch-up rule mistakenly makes catch-up contributions on a pre-tax basis. Under the Form W-2 correction method, the excess pre-tax amount, adjusted for earnings, is transferred from the employee’s pre-tax account to their Roth account, and the amount is reported as a Roth contribution on the employee’s Form W-2 for that year. This option is only available before the Form W-2 is issued, generally before January 31.
If the W-2 has already been issued, the plan may instead use the in-plan Roth rollover method, under which the pre-tax amount (plus earnings) is transferred to the employee’s Roth account and reported on a Form 1099-R for the year of correction. Both the contribution and earnings are taxable in that year, but no withholding is required at the time of transfer.
Alternatively, the plan may use the distribution method, distributing the pre-tax catch-up contribution (plus earnings) as an excess contribution. The first two methods are generally preferred because the corrected contributions remain in the plan.
Finally, no correction is required if the amount that should have been a Roth catch-up contribution is $250 or less, or if an employee’s wages are later determined to exceed the applicable threshold due to adjustments made after the correction deadline.
Time to Get Prepared
The new Roth catch-up requirements introduce some new administrative and operational challenges, including the need for accurate FICA wage tracking, payroll system updates, and proactive participant communication. With the 2026 effective date right around the corner, we recommend that you start preparing for this change right away. As always, if you have any questions please don’t hesitate to contact your Blue Ridge Associates Plan Consultant.
