How Employers Can Prep For New Rules on Roth Catch-Ups

The U.S. Department of the Treasury and Internal Revenue Service this week issued highly anticipated final regulations addressing Roth (after-tax) catch-up contributions implemented by the SECURE 2.0 Act of 2022 for which legal experts say the retirement industry should already be preparing.

The final rules require traditional catch-up contributions to be treated as Roth contributions when they are made by employees aged 50 or older whose prior-year income from their existing employer exceeded $145,000. According to legal experts, it behooves plan sponsors, payroll providers and recordkeepers to communicate effectively to ensure compliance with the regulations in an efficient manner.

“This is not something that, in 2026, an employer can just ignore,” says Michael Hadley, a partner in Davis & Harman LLP who advises clients on laws affecting retirement plans governed by the Employee Retirement Income Security Act.

Though the final rules will not be effective until plan years that begin after December 31, 2026, the government agencies expect “a reasonable, good faith” interpretation of the regulations by 2026.

Legal experts say that to meet the deadline, defined contribution operators need to act immediately.

“Recordkeepers, payroll providers, plan administrators are all full steam ahead to make sure that all the processes are in place to be able to comply with these legal requirements,” says Katie Kohn, a partner in Thompson Hine LLP, who advises clients on qualified retirement plan compliance. “But it’s not going to be easy.”

Where to Start

The first step, according to legal experts, is the payroll system, which can ensure employees whose income exceeds the $145,000 limit are switched over to Roth contributions after they max out their pre-tax contributions.

To make the process easier, plan sponsors can adopt a “deemed election,” which would automatically convert pre-tax catch-up contributions to Roth once the participant reaches the pre-tax contribution limit. In such cases, participants have an opportunity to opt out by stopping or changing deferrals, but Roth is the only way for plan participants older than age 50 and earning more than the compensation threshold to make catch-up contributions.

Perhaps most consequential, legal experts say, is the exchange of information between sponsors, providers, administrators and participants.

“The most important thing plan sponsors and plan administrators can do is to make sure that they are communicating clearly with participants, especially affected participants, as to what is going to change in terms of catch-up contributions so that they can avoid participants being surprised about suddenly making catch-up contributions in Roth versus pre–tax dollars,” Kohn says.

Multiemployer Plans, 403(b)s

Given the importance of payroll systems to compliance, the IRS and Treasury significantly heeded advice provided during the comment period on the rules by providing relief to multiemployer plans that lack the payroll information held by traditional employers, says Andrew Oringer, a general counsel at the Wagner Law Group who advises clients on ERISA-related issues.

The regulators made two noteworthy adjustments specifically for multiemployer plans. First, unlike the new rules for other plans, unless optional aggregation rules are in place, wages from different employers within a multiemployer plan are not combined to determine if the Roth catch-up wage threshold is reached. Second, an exception was added to the final rules that gives multiemployer plans extra time to comply with the regulations.

Meanwhile, 403(b) and certain government plans received less flexibility, since the plans tend to have fewer regulatory restrictions than 401(k) plans.

“This will be challenging for initial implementation, and then, soon enough, this all becomes the fabric,” Oringer says.