Author: Steven Grieb
September 2025
On September 16, 2025, the IRS finalized regulations providing guidance regarding the SECURE 2.0 Act of 2022 (SECURE 2.0) rule requiring certain participants to contribute catch-up contributions only on a Roth basis. The final rules follow IRS Notice 2023-62, which gave some limited guidance on this directive and provided relief by giving a two-year administrative transition period, effectively moving back the compliance date from 2024 to 2026.
SECURE 2.0 Roth catch-up rule
Under SECURE 2.0, any 401(k) plan, 403(b) plan or governmental 457(b) plan that permits participants to make catch-up contributions must require such contributions to be designated Roth contributions (the "Roth catch-up rule").
- This restriction only applies to participants whose compensation during the prior year exceeds $145,000 (as adjusted annually for inflation).
- Participants who earned $145,000 or less in the prior year still can defer catch-up contributions on a pre-tax basis.
- Participants over age 50 who earn more than $145,000 generally may not elect to make their catch-up contributions on a pre-tax basis.
- The Roth catch-up rule doesn't apply to SIMPLE IRA plans or SEP plans.
Offering catch-up contributions is optional for qualified retirement plans. However, if a plan allows participants to make catch-up contributions, the new Roth catch-up rule will be mandatory.
Roth catch-up rule effective date
As the 2026 deadline for the Roth catch-up rule has approached, many in the retirement plan industry have become concerned about plan sponsors' ability to properly apply the rule on a timely basis. Plans required guidance on numerous issues even after the IRS issued proposed regulations in January 2025. Several retirement plan industry groups had asked the IRS to postpone the effective date to 2027.
The final regulations don't provide an additional delay for implementing the rule. However, retirement plans won't be bound by the provisions of the regulations until 2027. For 2026, plan administrators need only comply with a good-faith interpretation of the text of SECURE 2.0 as it relates to the Roth catch-up rule.
Applying the Roth catch-up rule
The final rule updates the Treasury regulations to provide that when a participant who is subject to the Roth catch-up requirement reaches their annual deferral limit, the plan can deem the participant to have switched a pre-tax election to a Roth election. Of course, the participant must be allowed to stop or change deferrals if they wish. Alternatively, the plan can stop the participant's deferrals altogether until the participant affirmatively elects Roth contributions. If the participant who has been deemed to make a Roth election ceases to be subject to the Roth catch-up rule (for example, because their employer realized an error in calculating their compensation), the plan must switch their deferrals back to pre-tax within a reasonable time.
If a participant makes Roth contributions prior to beginning catch-up deferrals, those Roth contributions can be considered for purposes of determining whether the Roth catch-up rule is met. Consequently, plans could allow participants who have already made some Roth contributions to make catch-up deferrals on a pre-tax basis. In-plan Roth rollovers won't count toward satisfying the Roth catch-up rule. The final regulations give plans the flexibility to deem a participant to have switched to Roth, even if they made Roth contributions earlier in the year. However, if such a participant makes an affirmative election to go back to pre-tax, that request must be honored.
Some plan administrators have asked if they could simplify plan operations by merely requiring all catch-up contributions to be made on a Roth basis, regardless of how much (or how little) the participant earned last year. The final rules don't permit that approach. As a result, plan sponsors should avoid this tactic, barring future guidance.
Who's subject to the Roth catch-up rule?
When determining which participants have earned more than $145,000 in the prior year, SECURE 2.0 uses FICA wages. The final regulations specify that anyone who didn't have FICA wages from the employer in the previous year can make pre-tax catch-up contributions. This regulation excludes from the Roth catch-up rule a partner who only had self-employment income and state or local government employees who aren't subject to FICA withholding. The preamble to the regulations specifically states that plans should use W-2 Box 3 for this purpose.
Significantly, the final rules indicate that the plan only needs to consider compensation paid by the employer sponsoring the plan, disregarding other entities in the controlled group. At the request of many within the retirement industry, the final regulations permit plans to aggregate compensation from other companies within the employer's controlled group, as well as multiple companies that use a common paymaster.
Additionally, the regulations don't require that the Roth catch-up wage threshold be prorated for the first year of hire. A participant hired during the prior year would be subject to the full Roth catch-up threshold amount only if they earned the full $145,000 from the employer, regardless of when they were hired during the year.
Universal availability rule
The Internal Revenue Code contains a universal availability rule for catch-up contributions. Under this requirement, all catch-up eligible participants must be provided with an effective opportunity to make the same dollar amount of catch-up contributions. However, if a plan doesn't offer Roth contributions, then participants who earn more than $145,000 in the prior year will have a catch-up contribution limit of zero dollars.
The final regulations address this situation by providing that plans that don't offer a Roth feature won't violate the universal availability requirement merely because the plan disallows participants who are subject to the Roth catch-up rule from making catch-up contributions. Consequently, a plan that doesn't offer Roth contributions to participants can still allow for catch-up contributions, but only for participants who didn't earn more than $145,000 in the prior year.
Correcting Roth catch-up errors
If a participant subject to the Roth catch-up rule makes a pre-tax deferral above an applicable limit, the plan must correct the error. That requirement creates a significant concern when a highly compensated employee's pre-tax deferral is re-classified as catch-up after the fact to correct a nondiscrimination testing failure. The plan could correct the error by distributing to the participant the amount of funds that exceeded the pertinent limit. On a positive note, the final regulation gives two additional correction possibilities:
- If the correction happens before the participant receives their Form W-2, the plan can transfer the catch-up amount — adjusted for earnings — from the participant's pre-tax account to their Roth account. The unadjusted amount would be included in the participant's taxable income for the year of the deferral.
- The plan could perform an in-plan Roth rollover from the pre-tax account after adjusting the catch-up amount for earnings. This correction method is an option even if the plan document doesn't otherwise allow for in-plan Roth rollovers. The adjusted amount would be included in the participant's taxable income in the year of the deferral.
Increased catch-up limit for certain years
On a related note, SECURE 2.0 also contained a rule allowing increased catch-up contributions for some participants. Specifically, the statute provides for higher catch-up limits during the taxable years that the participant attains age 60, 61, 62 or 63. A participant who turns 64 during the taxable year can't take advantage of the higher limit for that year. This rule became effective for taxable years beginning in 2025. The final regulation updates the US Treasury regulations to reflect the increased catch-up limit for those years.
For the four years in question, the increased limit will be the higher of $10,000 (adjusted for inflation) or 150% of the otherwise applicable catch-up limit. The general limit is also annually adjusted for inflation. For 2025, the catch-up limit equals $7,500. Consequently, the increased catch-up limit for the 2025 taxable year equals $11,250. Of course, if the participant is subject to the Roth catch-up rule, any catch-up contribution must be made on a Roth basis, including the additional catch-up.
Unlike the Roth catch-up rule, the increased catch-up limit is an optional feature. Plans could decide to continue with a uniform catch-up limit for all employees. However, catch-up provisions are extremely common, and most plans have elected to offer the higher limits for eligible participants. The final rule amends the US Treasury regulations to make clear that offering the increased catch-up amount won't cause a plan to violate the previously discussed universal availability rule.
Gallagher insight
Properly implementing the new Roth catch-up rule will require coordination with the plan's recordkeeper, payroll provider, third-party administrator (TPA) and perhaps other service providers. Plan sponsors should begin work immediately toward getting all necessary parties on board with full compliance.
As always, your Gallagher consultant is here to help with any questions or assist in getting all stakeholders on the same page.
