Roth Catch-Up Contribution Mandate

Much has been written about the numerous retirement plan implications of the SECURE 2.0 Act since it was enacted at the end of 2022, which triggered several changes in 2023 and 2024. Now, after a two-year postponement, another significant provision milestone is upon us. Beginning in 2026, the Act mandates that catch-up contributions (CUPs) must be made on a Roth basis, for “high-paid” retirement plan participants earning more than $145,000 in FICA wages during the prior calendar year. This threshold is indexed for inflation and applies only to employees who received FICA wages—self-employed individuals such as sole proprietors or partners are excluded from this requirement.

CUPs allow individuals aged 50 and older to contribute additional amounts to retirement accounts beyond the standard IRS limits. For example, in 401(k) plans, the standard payroll deferral contribution limit in 2025 is $23,500, with an additional $7,500 CUP allowed. For IRAs, the base limit is $7,000, with a $1,000 CUP. Under the new Roth mandate, eligible high-paid individuals (HPIs) must make these CUP’s on an after-tax Roth basis. This shift, presumably aimed at raising more federal revenue, may affect tax planning and retirement income strategies.

Although this mandate may sound straightforward, it creates significant administrative and operational work for employers and retirement plan industry providers. For starters, plans that do not offer Roth contribution options will be unable to accept catch-up contributions from HPIs, effectively defaulting their catch-up eligibility to $0. This creates a compliance risk and underscores the need for plan sponsors to ensure Roth options are available and properly administered. Additionally, plan sponsors must notify eligible participants of the Roth requirement and ensure their systems can distinguish between Roth and pre-tax contributions.

Payroll providers will play a critical role in identifying HPIs and managing contribution processing. They must monitor pre-tax and Roth deferrals separately and ensure that contributions are correctly classified once the IRS deferral contribution limit is reached. Plans may administer catch-up contributions using either the spillover method—where contributions automatically continue as catch-up once the regular limit is met—or the separate election method, where catch-up contributions are elected independently.

Whenever new procedures are introduced, mistakes are bound to happen so administrators should be prepared to correct errors in contribution classifications. Two IRS-approved correction methods are available:

1. Form W-2 Correction: Supports recharacterizing pre-tax CUPs as Roth, and reports them on the W-2 for the year of contribution. This method is time-sensitive and must be completed before the W-2 is filed.
2. Form 1099-R Correction: Supports converting pre-tax CUPs and earnings to Roth, and reports the total as taxable income on Form 1099-R. This method offers more flexibility and is preferred for corrections that would be identified after the calendar year is over (e.g. during year-end testing).

To comply with the Roth catch-up mandate, plan sponsors, payroll providers and recordkeepers must coordinate data exchange, monitor contribution limits and ensure accurate participant communications. Systems must be configured to track Roth CUPs status, apply the Roth designation appropriately and support participant deferral changes. Plans must also ensure that participants have an effective opportunity to opt out of Roth CUP’s if desired.

In summary, the Roth CUPs requirement introduces a significant operational shift for retirement plans. It affects plan design, payroll processing, participant communications and compliance procedures. Employers and retirement plan providers must ensure that all systems and stakeholders are aligned to meet the January 2026 implementation deadline and maintain compliance with IRS regulations.