IRS releases final catch-up regulation

On September 15, 2025, IRS issued a final regulation amending rules for 401(k) catch-up contributions, reflecting changes made by SECURE 2.0, including rules implementing the requirement that catch-up contributions made by certain participants must be made as Roth contributions.

The big news – no delay, Roth catch-up rules go into effect in 2026

Notwithstanding intense pressure from sponsors and providers, IRS is not extending its temporary “administrative transition period,” under which the requirement that certain higher paid catch-up eligible employees would not have to make catch-up contributions as Roth contributions (taxed on the way in/not taxed on the way out) until taxable years beginning after December 31, 2025.

The final rules, however, generally apply to contributions in taxable years beginning after December 31, 2026. For 2026 (and prior years), a “good faith interpretation standard” applies.

In what follows we provide a summary of some key points of IRS’s final regulation. We caution that this regulation is very technical, and the rules it articulates can be quite complicated/subject to multiple exceptions. This summary is intended as an outline of the main points – sponsors working with specific questions/issues will want to consult with counsel.

Background

Under the Tax Code, a participant who is age 50 or older during the taxable year may make “catch-up” salary reduction contributions to a 401(k) plan over and above the 402(g) limit ($23,500 for 2025) on salary reduction contributions (and certain other limits). For 2025, this “regular” catch-up contribution amount is $7,500, so for these participants the (2025) total limit on salary reduction contributions is (before the SECURE 2.0 change discussed below) $31,000.

SECURE 2.0 made two significant changes to these rules:

• For taxpayers aged 60, 61, 62, or 63 during a taxable year, the catch-up contribution limit essentially increases the regular contribution limits by the greater of $10,000 or 50% more than the regular catch-up amount, indexed for inflation after 2025. Thus, for 2025, this “super” catch-up amount is $11,250, for a total limit on salary reduction contributions by these participants of $34,750.

• Beginning in 2024, any contributions made by participants “whose FICA wages … for the preceding calendar year from the employer sponsoring the plan exceeded $145,000” must be made on a Roth basis – that is, taxed at regular income tax rates when contributed, with no taxation on distribution. As noted, under IRS Notice 2023-62, this change was effectively delayed until 2026.

  • This “$145,000 prior year FICA” test is why providers/sponsors have had so many problems complying with the new Roth catch-up requirement. Those problems include: payroll provider/recordkeeper data conflicts; the fact that recordkeepers have generally not tracked FICA wages; and anomalous differences between who-is-an-HCE (highly compensated employees under the regular 401(k) ADP test) and who-had-FICA-wages-over-$145,000 for the prior year.

The final regulations

IRS’s final regulations address certain issues with respect to these two changes.

Increase for taxpayers aged 60-63

• “Super” catch-up and universal availability requirement: The 401(k) and Tax Code nondiscrimination rules generally provide that a plan that offers catch-up contributions must offer them to all catch-up eligible participants in the same dollar amount (the “universal availability” requirement). The regulation provides an exception to this rule for the increased catch-up amount available to participants aged 60-63.

“Rothification” of contributions by participants with more than $145,000 in prior-tax year wages

• Plans may “deem” catch-up contributions to be Roth contributions where required: The regulation permits a plan to provide that participants subject to the Roth catch-up requirement are deemed to have irrevocably designated any catch-up contributions as designated Roth contributions where necessary to comply with the new rule. Availability of this treatment would be conditioned on the participant having “an effective opportunity … to make a new election that is different than the deemed election.” (Adoption of deemed catch-up treatment is a condition for availability of two new correction options, discussed below.)

• No FICA wages for prior year, no Roth treatment: The regulation clarifies that a participant who did not have FICA wages in the previous taxable year (“for example, a partner who had only self-employment income”) would not be subject to the Roth catch-up requirement.

• Roth catch-up contributions and the universal availability requirement:

  • Under the “universal availability” requirement (noted above), if Roth catch-up contributions are allowed for participants above the $145,000 threshold, the plan must provide “that any catch-up eligible participant [including, e.g., those below the $145,000 threshold] may make catch-up contributions as designated Roth contributions.”

  • A plan is not required to include a qualified Roth contribution program. Under these plans, an otherwise catch-up contribution eligible participant whose previous tax year FICA wages exceeded $145,000 could not make catch-up contributions. Subject to certain qualifications, however, participants whose previous tax year FICA wages did not exceed $145,000 could be allowed to make catch-up contributions, without violating the “universal availability” rule.

  • More generally, a plan would not violate the universal availability requirement merely because it permits each catch-up eligible participant to make elective deferrals up to the maximum dollar amount permitted under applicable law.

• Flexibility as to timing of Roth catch-up contributions: Generally, determining whether a contribution is a catch-up contribution (and thus, for participants over the $145,000 threshold, would have to be made on a Roth basis) would be made at the time the contribution is made (e.g., after the participant has made “regular” 402(g) maximum contributions). The regulation does, however, allow flexibility as to timing, e.g., allows a catch-up eligible participant to make “elective deferrals as designated Roth contributions during the … year equal to the applicable dollar catch-up limit.”

  • Generally, when catch-up contributions “kick in” (e.g., after participant contributions exceed the 402(g) limit), the amount of additional/catch-up contributions required to be designated as Roth contributions is net of prior Roth contributions for the year. Unless a participant affirmatively elects otherwise, however, a plan would be allowed to disregard these pre-catch-up Roth contributions.

• Narrow interpretation of “wages from employer sponsoring the plan” for purposes of the $145,000 threshold: The regulation provides a narrow approach to determining the wages considered in applying the $145,000 threshold: Only FICA wages paid by the employer sponsoring the plan are considered. Wages paid by, e.g., other employers in a controlled group, e.g., where the participant has transferred from one subsidiary to another, are generally not taken into account. And, where more than one employer sponsors the plan – either as part of a controlled group or in a multiple employer or multiemployer plan – the $145,000 threshold is determined without aggregating those wages with the FICA wages from those other employers.

  • In applying the $145,000 FICA rule, however, the final regulation allows employers, for administrative convenience, to aggregate employers in a controlled group or, e.g., employers that use a common paymaster.

• Correcting mistakes: As an alternative to making a corrective distribution of contributions that went into the plan on a pre-tax basis in violation of the Roth catch-up rule, the regulation provides two additional options:

  • Form W-2 correction method. If the W-2 for the participant for the year has not yet been filed, the plan may simply include “the contribution (not adjusted for allocable gain or loss) in the participant’s gross income for the year of the deferral as if the contribution had been correctly made as a designated Roth contribution.”

  • In-plan Roth rollover correction method. A plan may “directly roll over the elective deferral (adjusted for allocable gain or loss) from the participant’s pre-tax account to the participant’s designated Roth account and report the amount of the in-plan Roth rollover on Form 1099-R … for the year of rollover.”

As noted above, these two correction options are generally only available where the plan has implemented a deemed Roth contribution requirement. And, for any year, the same correction method must be used for similarly situated participants.

Timing of correction. Generally, “all corrective steps required … in order to avoid a qualification failure [must be made by] the last day of the taxable year following the taxable year for which the elective deferral was made.” There are a number of other correction/corrective distribution deadlines, however, that have earlier deadlines. Where there is a Roth catch-up contribution failure, sponsors will want to immediately review with counsel correction requirements and available correction options.

Plan sponsors need to be aware that not all providers (plan recordkeepers and payroll providers) have the same systems and the same ability to coordinate. Before making any decisions that will be in place for 2026 plan years, it would be prudent to confirm with all applicable providers that they are prepared and equipped to handle the processes and options that sponsors would like to offer to their employees.

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We will continue to follow this issue.