Starting January 1, 2026, the SECURE 2.0 Act mandates that employees aged 50 and older who earn more than $145,000 in Social Security (Box 3 of Form W-2) wages from the same employer in the prior year must make all catch-up contributions to their 401(k), 403(b), or governmental 457(b) plans on a Roth (after-tax) basis.  While the statute makes this rule effective for taxable years beginning after December 31, 2025, the IRS’s final regulations provide a “reasonable, good-faith compliance” period through 2026. In practice, this gives plan sponsors an additional year to update systems and processes before full enforcement begins in 2027.

This change aims to simplify tax reporting and ensure that higher earners pay taxes upfront. However, it introduces new compliance challenges for plan sponsors.

Understanding the $145,000 Social Security Wage Threshold

The $145,000 threshold applies to a participant’s Social Security wages from the prior calendar year. For example, for the 2027 plan year, the determining factor will be the participant's 2026 Social Security wages. It's important to note that this threshold is subject to future annual cost-of-living adjustments. 

Employers must track social security wages accurately to determine which employees are subject to the Roth catch-up requirement. This tracking should be done at the employer level, not aggregated across related employers. 

Check out our blog, IRS & Treasury Issue Final Regulations on Roth Catch-Up Contributions Under SECURE 2.0 for the full details. 

Action Steps for Plan Sponsors

To ensure compliance with the new Roth catch-up rule, plan sponsors should:

1. Coordinate with Payroll and TPAs: Work closely with payroll departments and third-party administrators to accurately track Social Security wages and identify participants who meet the $145,000 threshold.
2. Update Plan Documents: Review and amend plan documents to reflect the new Roth catch-up requirements, ensuring they align with the SECURE 2.0 Act provisions. Employers can apply a reasonable, good-faith interpretation standard with respect to statue effective at the start of 2026 until final regulations apply in 2027.
3. Communicate Changes to Participants: Inform affected participants about the new requirements and provide guidance on how it impacts their contributions.
4. Implement System Changes: Ensure that recordkeeping and payroll systems are updated to automatically designate catch-up contributions as Roth for eligible participants.
5. Monitor Compliance: Regularly review procedures to ensure ongoing compliance with the Roth catch-up requirements.

Super Catch-Up Contributions for Ages 60-63

Under SECURE 2.0, participants aged 60 to 63 are eligible for increased catch-up contribution limits. For 2025, the catch-up limit is $11,250, up from the standard $7,500. These higher limits are also subject to the Roth designation if the participant's Social Security wages exceed the $145,000 threshold. 

Employers should ensure that their plans accommodate these enhanced limits and that systems are in place to track eligibility based on age and income.

Best Practices to Avoid Errors

To minimize the risk of errors:

• Automate Designations: Where possible, set up systems to automatically designate catch-up contributions as Roth for HPIs.
• Regular Audits: Conduct periodic audits to ensure that contributions are being properly designated and that Social Security wage thresholds are being accurately applied.
• Training: Provide training for staff involved in plan administration to ensure they are aware of the new requirements and how to implement them effectively.
• Clear Communication: Maintain open lines of communication with payroll departments and providers, third-party administrators, and participants to address any questions or issues promptly.

Error Correction Options

The IRS has provided guidance on correcting errors related to the Roth catch-up requirement. If a participant is required to make Roth catch-up contributions and has already reached the standard deferral limit, any additional catch-up contributions will automatically be treated as Roth contributions. If it is later determined that the participant is not subject to the Roth requirement, such as when their wages do not exceed the $145,000 threshold, this automatic Roth designation must be reversed within a reasonable period. If a participant's catch-up contributions are incorrectly designated as pre-tax, employers should:

• Correct the Error Promptly: Recharacterize the contributions, adjusted for earnings, as Roth as soon as the error is identified.
• Notify Affected Participants: Inform participants of the error and the correction process.
• Document the Correction: Maintain records of the error and the steps taken to correct it.

Employers should also review their error correction procedures to ensure they align with IRS guidelines. Generally, corrections must be completed by the end of the tax year following the year the contribution was made.

If you have questions about how these changes affect your plan, please reach out to us. We're here to help you navigate these updates. We encourage plan sponsors work closely with their payroll company and third-party administrator to ensure your plan remains in compliance.