IRS Issues Roth Catch-Up Contribution Rules for Highly Paid Participants

Quick Hits

• Employees who earned more than $145,000 for the prior taxable year will be able to make catch-up contributions as Roth contributions, but not as pre-tax contributions.
• The new rules will apply to contributions in taxable years beginning after December 31, 2025, but will require strict compliance beginning January 1, 2027.

Individuals who participate in their employer’s retirement plan are limited in the amount of salary that they can defer into the plan each year. However, participants aged fifty and older can make an annual catch-up contribution over and above the regular limit. The maximum annual catch-up contribution for 2025 is $7,500. Historically, participants could choose whether to make both regular deferral contributions and catch-up contributions on a pre-tax basis or a Roth basis, if their plan offered Roth contributions.

However, some highly paid participants are now limited to making catch-up contributions only on a Roth basis. Specifically, if an employee’s prior‑year Social Security wages exceed $145,000, any catch‑up contributions for the current year must be designated as Roth contributions. This new requirement raised a number of questions from employers, plan administrators, payroll providers, and recordkeepers about how to coordinate the determination of who is subject to the Roth catch‑up rules, whether plans would be required to allow participants to make Roth contributions, and how to designate catch-up contributions as Roth for affected participants.

The new regulations confirm that plans should determine impacted participants by looking at each participant’s prior year Social Security earnings as reflected in Box 3 on Form W-2.  Participants whose earnings exceed $145,000 (or the COLA limit of $150,000, if applicable) in 2025 will be subject to the Roth catch-up requirement for plan years beginning in 2026. Employees who did not have Social Security earnings from the employer during the prior year will not be subject to the Roth catch-up requirement.

Also, the regulations provide clarification as to who is considered an employer for this purpose. While the proposed regulations had indicated that affected participants should be identified by reference to a single entity, regardless of whether that entity was a member of a controlled group or affiliated service group, the final regulations provide permissive aggregation options. Specifically, an employer may choose to treat all related organizations as a single employer if the organizations all use a common paymaster or if the organizations are all within a controlled group or an affiliated service group. This is welcome news for many employers with complex corporate structures.

Plans may accomplish the required Roth treatment by deeming the affected catch-up contributions to be Roth contributions. Plans without a Roth feature are not required to add one and may instead bar highly paid participants from making catch-up contributions. For these plans, a nondiscrimination safe harbor is available if highly compensated employees have any compensation, including net earnings from self-employment, that exceeds the $145,000 (or applicable Box 3 Social Security limit) and are prohibited from making catch-up contributions.

Two plan‑level correction methods are available to plans when an error results in pre‑tax catch‑up contributions that should have been Roth: a Form W‑2 correction (before W‑2 filing) and an in‑plan Roth rollover (with 1099‑R reporting). Contributions less than $250 are subject to a de minimis exception.

While the new regulations apply for contributions in taxable years beginning after December 31, 2026, with later applicability for collectively bargained and governmental plans, plans must begin treating catch-up contributions of highly paid participants as Roth contributions in 2026.

Next Steps

Employers may wish to coordinate with third-party vendors and amend plan documents and online systems to:

• ensure that payroll and administrative programming can identify and properly treat affected catch-up contributions as Roth;
• amend the plan document to include Roth catch‑up provisions;

• implement processes to stop deemed Roth contributions within a reasonable time after a participant becomes no longer subject to the Roth requirement;
• if no Roth feature is offered in the plan, amend the plan to provide that highly paid participants and those without Social Security wages (e.g., self-employed) are not permitted to make catch-up contributions;
• update enrollment materials and annual notices to explain Roth catch‑up contributions and how to make a different election or opt out;
• in notices to participants, clarify tax reporting, in‑plan Roth rollover corrections, and five‑year Roth holding period impacts; and
• train HR, call centers, and client service teams on scenarios involving Box 3 vs. Box 5 wages, permissive aggregation, and wage attribution during a merger or acquisition period.

Ogletree Deakins’ Employee Benefits and Executive Compensation Practice Group and Employment Tax Practice Group will continue to monitor developments and will provide updates on the Employee Benefits and Executive Compensation and Employment Tax blogs as new information becomes available.

Katrina M. Clingerman is a shareholder in Ogletree Deakins’ Indianapolis office.

David S. Rosner is a shareholder in Ogletree Deakins’ Washington, D.C., office.

This article was co-authored by Leah J. Shepherd, who is a writer in Ogletree Deakins’ Washington, D.C., office.

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