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Starting January 1, 2026, high-earning retirement plan participants face a significant change to how their catch-up contributions are taxed. Under new IRS regulations, certain employees can no longer make pre-tax catch-up contributions—those contributions must now be designated as Roth. For plan sponsors, payroll administrators, and financial advisors, understanding this rule and acting on it before year-end is critical.
Who Is Affected by the Roth Catch-Up Rule?
The rule applies to catch-up eligible participants whose prior-year FICA wages from the employer sponsoring the plan exceeded $150,000. If that threshold was crossed in 2025, any catch-up contributions made to that plan in 2026 must be designated as Roth—not pre-tax.
The wages used to make this determination are those reported on Form W-2, Box 3 (Social Security wages), assessed on an employer-by-employer basis. Employees without Social Security wages—such as partners, independent contractors, or employees of an exempt state or local government—are not subject to this requirement. There is no automatic aggregation of wages across related or unrelated employers.
Optional Wage Aggregation
Plan sponsors do have the option to aggregate wages across certain employer groups. Aggregation is permitted for employers using a common paymaster under §3121(s), controlled group or affiliated service group members, and certain predecessor-successor situations involving asset purchases, using specified Form W-2 safe harbors. When aggregation is elected, wages from all included entities are treated as wages from the plan-sponsoring employer for purposes of the Roth catch-up determination.
When Does Compliance Apply?
The Roth catch-up rule applies to tax years beginning after December 31, 2025. Strict adherence to the final regulations is required after December 31, 2026. For 2026, a reasonable, good-faith interpretation of §414(v)(7) is the applicable standard. Collectively bargained, multiemployer, and governmental plans are subject to special applicability rules.
Plan Design Decisions for Sponsors
This rule creates several decisions that plan sponsors need to address now.
The first is whether to add a Roth contribution feature if the plan doesn’t already have one. This matters more than it might seem—if a plan has no Roth feature, participants subject to the Roth catch-up rule are prohibited from making catch-up contributions entirely. Adding a Roth feature preserves that option for affected participants.
The second decision is whether to adopt a deemed Roth catch-up election, which is the recommended approach for most plans. Under this design, any participant who meets the over-threshold criteria is automatically treated as having elected Roth treatment for their catch-up contributions, while still retaining the right to make a different election if they choose. This reduces administrative friction and lowers the risk of operational errors.
How to Correct Pre-Tax Catch-Up Contributions Made in Error
If a participant subject to the Roth catch-up rule mistakenly makes pre-tax catch-up contributions, correction is available—provided the plan includes a deemed Roth catch-up election and the plan sponsor had compliance procedures in place at the time of the deferral. Two correction methods are permitted.
The Form W-2 method is available before W-2s are issued. The catch-up amount, including earnings, is moved from the pre-tax account to the Roth account, and the original amount is reported as Roth on the participant’s W-2 for that year. This option closes once the W-2 has been furnished or filed.
The in-plan Roth rollover method can be used at any time. The catch-up amount, with earnings, is rolled directly from the pre-tax account into the Roth account within the plan, with the transaction reported on Form 1099-R in the year of the rollover. This method is available even if the plan does not otherwise permit in-plan Roth rollovers, since it is being used to correct an operational failure rather than as an elective participant transaction.
A plan may apply the W-2 method when it is available and use the in-plan Roth rollover method for everything else, or apply the in-plan Roth rollover method across all corrections. Whichever approach is chosen, similarly situated participants must be treated consistently. One additional note: no correction is required when a participant becomes over-threshold solely because of a late or amended W-2 discovered after the correction deadline has passed.
Plan Amendment Deadline
Plan documents must generally be amended to incorporate the Roth catch-up contribution rules by December 31, 2026. Governmental and collectively bargained plans have later applicable deadlines.
If you have questions about how these rules apply to your plan or your clients, PlanPerfect can help. Contact us at 949-223-8397 or visit planperfectretirement.com to connect with our team.
