FLASH IN THE PLAN: ROTH CATCH-UP CONTRIBUTIONS – FINAL REGULATIONS ISSUED

by: Alison Cohen, Esq., APR, APA

We last wrote in last quarter’s newsletter about the upcoming changes in 2026 to the Catch-up Contribution rules. Since that time, the Treasury has issued final Regulations (“Final Regs”), providing additional clarity and elections that plan sponsors must make. Our goal here is to highlight those elections and the pros and cons of each. While these rules become effective as of January 1, 2026, you do not need to formalize your choices until you adopt your SECURE/SECURE 2.0 Amendment before December 31, 2026. That Amendment should be prepared and sent to you by your document provider before the end of next year.

The Final Regs give plan sponsors more options for how to handle this complex plan provision. Some make your life easier, and some may make things more difficult. Here are our thoughts on those issues.

Just to remind you: employees who are affected by the new rules (“Highly Paid Individuals” or “HPIs”) will have to make any catch-up contributions in the form of Roth deferrals. An HPI is someone who has FICA wages in the prior calendar year in excess of a dollar limit. (The IRS just published that this amount is now $150,000 in relation to FICA wages earned in 2025 for the purpose of determining who is an HPI in 2026).

Deemed Versus Affirmative Election

The Final Regulations continue to allow plans to provide that all HPIs are deemed to elect to have the plan treat any catch-up contributions as Roth. This ensures that the amount of catch-up contributions is not distributed to the HPI, thereby keeping those funds in the Plan. However, HPIs must be given an “effective opportunity” to elect otherwise, if the HPI would rather have the money distributed than converted to Roth. The IRS did not clarify what this opportunity might look like, but it is our position that a conspicuous annual notice should meet this requirement.

Our Recommendation: We recommend that you talk to your third-party administrator (TPA) about putting this new language in the notices that will go out to your participants by the end of 2025.

Why Use the Deemed Election Method? It is easier to administer a deemed election than to solicit actions from your participants during the year when catch-up contributions arise. Even more important: when amounts are deposited as pre-tax and are later discovered to be catch-up contributions that must be Roth, correcting that misclassification is available for some of these errors only if the Deemed Election Method is used. Otherwise, any pre-tax amounts found to be catch-up contributions after they are deposited to the plan would need to be refunded to the participant.

The only advantage to using the Affirmative Election Method (rather than the Deemed Election Method) is that the HPI must be fully engaged in the process, so cannot be dissatisfied later if they would rather receive a distribution than conversion to Roth.

Any negatives to the Deemed Election Method? Yes. You need to remember to provide the notice of the right of an HPI to elect otherwise, and an HPI can claim they didn’t see or appreciate the impact of the Deemed Election and are unhappy with the reclassification to Roth. Nonetheless, this is likely to be less burdensome to you, as a sponsor, than having to elicit affirmative elections before catch-up contributions arise or force out distributions if the participant makes no affirmative election.

Our Recommendation: Run, don’t walk, and institute the Deemed Election Method.

Determination of HPI for Controlled/Affiliated Service Groups

One of the challenges presented in the Proposed Regulations was the determination of an HPI in a controlled or affiliated group of companies. Those regulations required that whether a participant is an HPI be determined for each company separately, even if they are related, and even if the companies all participate in the same plan. This could mean that a participant is an HPI for one of the related companies, but not for the others, so that some catch-up contributions must be Roth, and others need not be.

Under the Final Regs, you can now choose whether you want to make the HPI determination separately for each company or to make it using compensation from all companies, so that someone is either an HPI or not for the entire group.

A similar choice is also available to companies that use a common paymaster under Code § 3121(s).

There is one situation in which adding together the compensation of two companies is mandatory. If your company is a “disregarded entity” for tax purposes, such that the owner(s) is treated as the employer and the wages include amounts paid by the disregarded entity and by its owner, all amounts must be added together for HPI determination.  If you have a disregarded entity, talk to your accountant.

An example of how this might work – Pancake, Inc. has a plan that also covers employees of Waffle Hut and Crepe Place. All three companies are in a controlled group. Jimmy is paid $100,000 from Waffle Hut and $60,000 from Crepe Place. Pancake can make the election to either review Jimmy’s compensation separately for the two companies (in which case, he is not a HPI) or they can aggregate the compensation amounts (in which case, he is a HPI).

Should you elect to treat the companies separately or together? If you want to make administration for the company and the plan easier, yes. If you want to give participants the greatest chance for not having the Roth catch-up rules apply, no. Talk to your TPA to see what they recommend from a practical, administrative standpoint for your company. And, talk to your CPA to see if you fall under the “common paymaster” or “disregarded entity” situation.

Note for Plans with No Roth Contributions AND HCEs Who Aren’t HPIs

This issue may only impact a limited number of plans, but it is worth noting. This situation applies if:

• Your company has sole proprietors or partners who do not earn FICA wages, so are highly compensated
  employees (“HCEs”) for nondiscrimination testing, but not HPIs.
• You have other employees who are HPIs but are not HCEs.
• Your plan does not permit Roth contributions.

In this situation, your Non-HCE employees who are HPIs would not be permitted to make catch-up contributions, because your plan does not permit Roth amounts. But, your owners, who are HCEs but not HPIs, would be permitted to make catch-up contributions as pre-tax amounts. That creates discrimination concerns. The IRS recommended that such plans be amended to prohibit catch-up contributions for the HCEs who are not HPIs, so that they are treated the same as the non-HCE HPIs.

Our Recommendation: Talk to your TPA to see if this affects you and, if it does, do the amendment.

Including Roth Contributions Made Before Limit Reached

If an HPI makes Roth contributions to the plan before hitting a limit, you may elect whether or not to consider those amounts to be catch-up contributions, so that additional pre-tax amounts may be contributed.

Example: Rachele contributed Roth contributions from January – April of 2026. She changes her election to pre-tax deferrals and reaches her deferral limit of $24,500 in November (this is the 2026 limit for deferrals). Under Option 1, the Roth contributions made earlier in the year may be considered to be catch-up contributions, and Rachele can continue to make pre-tax deferrals through the end of the year. Under Option 2, all deferrals after Rachele has contributed a total of $24,500 will be Roth amounts, regardless of the earlier Roth contributions.

The decision of which option to choose is highly dependent on what your payroll provider can support. We have already heard that certain payroll providers will only permit Option 2 because of their system limitations.

Our Recommendation: Make an election that can be supported by your payroll provider and recordkeeper.

Summary of Correction Deadlines and Consequences

The IRS opened up some of the timing for correcting catch-up contribution not funded as Roth for HPIs, so it’s not as draconian as in the Proposed Regulations. You must still keep a close eye on the HPIs and make corrections by the end of the plan year following the year in which the contribution was made. However, earlier correction can save both the participant and your company from additional taxes in some circumstances. See below:

Another goodie the IRS gave us – if the excess catch-up that should be moved to Roth is $250 or less, it can remain pre-tax and no further action needs to be taken.

Additional Guidance on Increased 60-63 Catch-up Contributions

You may want to refer back to our 2024 4Q newsletter regarding these increased catch-up amounts for individuals between ages 60-63 for further details. In the Final Regulations discussed above, the IRS clarified two points. First, if a plan sponsor has adopted this increased catch-up contribution, it must do so as part of the 2026 SECURE/SECURE 2.0 Amendment. Therefore, you have until December 31, 2026, to adopt. Second, the IRS clarified that this is an all or nothing deal. In other words, if you offer a higher limit, it must be the maximum increase (e.g., you cannot increase the catch-up limit only to $10,000, rather than the permitted $11,250) or make it available only to some of your 60-63 aged group.

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If you have questions about any of these rules, be sure to let us know.  After all, we ARE your ERISA solution!

Talk to Your TPA

2026 will be the start of Roth Catch-up Contributions and we highly recommend that you discuss your options as soon as possible with your TPA.

SECURE/SECURE 2.0 Amendments are due by 12/31/2026!  Be sure to discuss with your TPA so that the amendment properly reflects your choices.

For those sponsoring a defined contribution plan (401(k), profit sharing, ESOP, etc.), the Cycle 4 restatement (a.k.a. SECURE restatement) will be kicking off. Every six years, plans are required to be updated for law changes. It is important that, when you receive your new plan document sometime between 2026 – 2028, you review it carefully and notify your TPA if you want to make any changes that can be incorporated into the restatement.

Upcoming Key Dates

January 2026 – If you have a calendar year plan, you should be collecting your 2025 census data to provide to your service provider for nondiscrimination testing.

January 31, 2026 – 2025 Forms W-2 and 1099R must be issued to recipients; HPI pre-tax catch-up contributions can be reclassified on the Form W-2 as Roth before Form is issued.

March 15, 2026 – Corrective distributions required for highly compensated employees due to failed 2025 ADP/ACP testing (for non-EACA plans).  Failure to make distributions will result in a 10% excise tax to be submitted on Form 5330.

March 15, 2026 – For Partnerships and S-Corps not filing under extension, plan employer contributions must be funded