Catching the Roth Wave: Payroll Pitfalls and Practical Fixes for the New Mandatory Roth Catch‑Up Requirement for Retirement Plans
Beginning January 1, 2026, age 50+ catch‑up contributions for “high‑paid participants” of 401(k), 403(b), and governmental 457(b) retirement plans must be made on a Roth basis. As a result, employers must identify who is a “high-paid participant” and ensure that corresponding catch-up contributions are characterized as Roth — even if a participant’s standing catch-up deferral election is pre‑tax. The Internal Revenue Service (IRS) recently released final regulations implementing the mandatory Roth catch-up, which will create pressure points for payroll systems, retirement plan recordkeepers, and plan sponsors. This update summarizes the new mandatory Roth catch-up requirement, highlights selected issues for payroll and human resources to consider, and recommends solutions to reduce compliance risk.
The New Mandatory Roth Catch‑Up Rule
Under final IRS regulations, a catch‑up eligible participant with FICA wages paid by applicable employer(s) above a wage threshold in the prior calendar year (as noted in Box 3 of the Form W-2) must have all catch‑up contributions made as designated Roth contributions. The new mandatory Roth catch-up rule applies to 401(k), 403(b), and governmental 457(b) plans. For 2026, participants with 2025 FICA wages of $150,000 or more will generally be required to make any catch-up contributions as Roth and not pre-tax. This rule applies to both normal catch-up contributions and “super” catch-up contributions that may be made by employees aged 60–63.
A participant’s FICA wages include wages paid by the plan sponsor (or another participating employer in the plan) and, depending on the decision of the plan sponsor, may be determined on an entity-by-entity basis or by aggregating the FICA wages paid by some or all participating employers in the plan, or some or all entities within the plan sponsor’s tax-controlled group regardless of plan participation. (In general, the plan sponsor should amend the plan prior to the end of calendar year 2026 to reflect its choice). Whatever choice a plan sponsor makes in this regard, also impacts whether a participant remains subject to the mandatory Roth catch-up rules. For example, if a plan sponsor chooses the entity-by-entity approach, then the participant is subject to the mandatory Roth catch-up requirements only while employed by the entity that paid them FICA wages above the threshold.
Employees with no FICA wages paid by the plan sponsor (or other participating or controlled group employers), such as new hires, in the prior year will not be subject to the Roth catch‑up mandate for the following year.
As noted below, plan sponsors and relevant departments should consider several issues before making decisions about operations and plan amendments.
Payroll Systems and Data Flows
This Roth catch-up requirement creates several potential challenges for employers and their plan service providers, including those below.
Who is subject to the rule?
First, plan sponsors and their payroll departments must determine who is subject to the Roth catch‑up rule. To do that, payroll must have the correct prior‑year FICA wage data to identify affected participants (possibly including all tax controlled-group FICA wages). Employers that changed payroll providers in 2025, completed a merger or acquisition (and have multiple payroll providers as a result), or underwent a corporate reorganization must validate that they have complete and accurate 2025 FICA wage data. Also, employee movement within a tax-controlled group may complicate the wage‑threshold analysis, depending on the choices made by the plan sponsor to determine FICA wages. Individuals or teams from payroll, human resources, legal, and finance may need to confer about how their systems are currently capturing FICA wages and how employee movement amongst entities may affect how FICA wages will be determined, as well as the approach if new employing entities are acquired or created. This may impact the choices made regarding the determination for FICA wages.
For employers who acquire another business through an asset purchase situation, the final rules allow the plan sponsor to combine the FICA wages from the predecessor employer (i.e., the asset seller) with the successor employer (i.e., the plan sponsor/purchaser) and treat the sum as being paid by the successor employer for purposes of determining if the participant hit the FICA wage threshold in the year of the acquisition if the successor employer files a single Form W-2 reporting the wages from both the predecessor and successor employers (via the alternate procedure set forth in IRS Revenue Procedure 2004-53). Otherwise, the wage threshold would be determined by the wages reported by the successor employer (as noted in Box 3 of the Form W-2).
Because wages fluctuate, designation as a “high-paid participant” may also fluctuate, and some employees will inevitably move into or out of that category and its restrictions from year to year, so plan sponsors (and other relevant employers) will need to ensure accurate tracking and not simply set it and forget it.
Will deemed elections be implemented?
Another challenge will be determining whether to implement “deemed” Roth catch-up elections for high-paid participants, provided your payroll system can do so. For background, plans that allow for catch-up contributions generally do so via a separate election (where participants make a separate election for catch-up contributions that does not kick in until plan limits are met), a tentative election (similar to the separate election except that the catch-up contributions are taken immediately and if plan limits aren’t met, the catch-up money is recharacterized as a regular contribution), or a spill election (where participants make a single election that applies to compensation until plan limits are met, i.e., as regular contributions, and then continues on as catch-up contributions thereafter). The final rules allow plan sponsors to “deem” (i.e., automatically convert) a high-paid participant’s pre-tax catch-up election to Roth, without such participant’s consent and regardless of whether the plan uses a separate, tentative, or spill election.
To take advantage of this deemed approach, however, such participants must be given an effective opportunity to make a new election that is different from the deemed election, such as allowing the participant to stop making additional deferrals (opt out of making catch-up contributions). In addition, any deemed election must stop within a reasonable time after the person is no longer a high-paid participant.
The benefits of using a deemed Roth approach include easing administrative burdens for plan sponsors, plus the ability to take advantage of two correction methods that permit converting pre-tax catch-up contributions to Roth, if necessary (rather than simply distributing the “excess” amount from the plan back to the participant). These corrections consist of moving the impacted participant’s pre-tax catch-up contributions (adjusted for gains or losses) to their Roth account and then either (1) reflecting the Roth contribution amount (on the participant’s Form W-2 for the relevant year, if it has not yet been filed or furnished, or (2) treating it as an in-plan Roth conversion, if the correction is completed by the last day of the year following the year for which the elective deferral was made). This second approach may be used even if the plan doesn’t provide for participant-elected in-plan Roth conversions. (The final regulations do not require any correction for errors that do not exceed $250, excluding earnings.) Either or both correction methods can be used, if the plan applies the same correction method to similarly situated participants.
What if we can’t or don’t implement deemed elections?
While there may be some benefits for plan sponsors that implement deemed elections, doing so is not mandatory, and that ability is conditioned somewhat if not completely by the sophistication of your payroll systems. But all is not lost for these situations, and we have already come across situations where payroll providers cannot support a deemed election. Typically, providers in those situations indicate they’re implementing procedures that prevent high-paid participants from making pre-tax catch-up contributions, such as turning off pre-tax contributions once someone reaches the applicable contribution limit (such as the 402(g) limit for 2026 of $24,500); in this situation, if the participant would like catch-up contributions to be made, they would have to affirmatively elect Roth catch-up. If those procedures work as planned, then no errors should occur and not having the ability to use new correction procedures won’t matter. Even such preventative measures require coordination, however, because there needs to be communication and coordination for who will be a high-paid participant for the year and ensuring regular (non-catch-up) contributions cease once the limit is reached, then allowing the participant to turn on Roth contributions to fill up the catch-up bucket.
What other challenges will your company face?
Aside from the challenges above, other plan- and employer-specific nuances can create additional payroll difficulties. For example, plans that don’t have a Roth feature may face backlash from high-paid participants, because those employees won’t be able to make catch-up contributions, because they can’t do so on a pre-tax basis, but employees who aren’t high-paid participants will still have that ability. Other questions abound as well, such as what programming needs to happen for payroll and human resources and information systems, and what tests or pro forma payrolls can be run in advance to limit the number of errors? While it may be impossible to anticipate all questions in advance, having conversations now with your recordkeeper, payroll provider, human resource and payroll departments, and legal counsel will better help plan sponsors anticipate and plan for changes and other adjustments.
How and when will you provide notice and information to participants?
Once plan sponsors have made decisions about what they will do, they should inform plan participants about these new rules and how the sponsor will implement them. And all of this should be done in advance of the January 1, 2026, deadline to give participants adequate time to ask questions, consult with their tax or financial advisors, and consider whether to make changes to the type and amounts of their deferrals. While plan documents and materials like summary plan descriptions may not need to be amended for many months, participants should not be kept in the dark, and plan sponsors should work with their recordkeepers and legal counsel to prepare notices, email updates, and other communications now and in the future as needed to ensure the best transition possible.
Conclusion and Questions to Consider
The mandatory Roth catch-up wave is coming for nearly all employers who sponsor a 401k, 403(b), or governmental 457(b) plan. To catch the wave, employers should start talking with their payroll provider and recordkeeper today. For most employers, simply continuing current payroll and retirement plan operations as-is will cause compliance problems. Below is a checklist of items employers should work through with their payroll provider, recordkeeper, and legal counsel:
Does our plan permit catch-up and/or Roth contributions? If it permits catch-up, but not Roth, are we adding Roth for 2026, or prohibiting high-paid participants from making catch-up contributions?
Do we have the necessary 2025 FICA data to properly identify participants that are subject to the new mandatory Roth catch-up in 2026?
Can our payroll administer deemed Roth catch-ups starting January 1, 2026? If not, can we administer deemed Roth catch-ups at any point in 2026?
What is our recordkeeper requiring us to do to document how Roth catch-ups will be administered? Do we need to opt-out of deemed Roth catch-ups?
What (if anything) have we communicated with participants about how this new requirement will work? How many communications (and when) should we provide?
What questions does my company and team have about these new rules and when will we discuss them with our recordkeeper and legal counsel?
Foley’s employee benefits practice group is well-versed in all aspects of the mandatory Roth catch-up and the new IRS guidance, including how these can impact payroll processes, recordkeeper workflows, participant communications, and other employer plan sponsor functions. Foley routinely uses this experience to advise all types of clients on the nuances involved with retirement plan administration in an everchanging regulatory environment, including in the complex contexts of post-acquisition integration, correcting past and avoiding future compliance issues, during plan winddowns, and many others.
