IRS issues final regulations on Roth catch-up requirements

The Internal Revenue Service (IRS) recently released final regulations providing guidance for retirement plans that allow participants age 50 and older to make additional catch‑up contributions.

These regulations interpret changes made by the SECURE 2.0 Act of 2022, notably mandating that catch‑up contributions from high‑wage participants—those with prior‑year FICA (Social Security) wages over $145,000, indexed for inflation—must be designated Roth contributions. Following is an overview of the main updates from the final rules.

No delay in effective date

Originally, the Roth catch‑up requirement was set to take effect for taxable years starting after December 31, 2023. However, IRS Notice 2023‑62 provided a two‑year transition, meaning plans now must comply for taxable years beginning after December 31, 2025. The proposed regulations, which were issued in January 2025, were designed to apply six months after final regulations are released.

For most plans except multiemployer collectively bargained plans (which have a delayed timeline), the Roth catch‑up requirement starts in 2026. A “reasonable, good faith interpretation” is required for 2026, with full compliance with the final regulations beginning in 2027.

Deemed Roth catch‑up elections

Plans may automatically treat catch‑up contributions from high‑wage earners as Roth contributions. This permits a plan, for example, to automatically switch a participant’s election to contribute pretax deferrals to an election to contribute Roth deferrals once the regular deferral limit ($23,500 in 2025) is reached.

The application of a deemed Roth catch‑up election is conditioned on the participant having an effective opportunity (based on all relevant facts and circumstances) to make a new election that is different than the deemed election. For example, a plan would need to permit a participant who is subject to a deemed Roth catch‑up election to cease making additional elective deferrals.

The final regulations provide flexibility in the timing of implementing deemed Roth catch‑up elections. Plans can switch pretax contributions to Roth contributions after a high‑wage earner’s pretax (excluding Roth) contributions reach the 402(g) limit (the maximum in elective deferrals a participant can make in a calendar year, excluding catch‑up contributions).

The final regulations also permit a plan to switch a high‑wage earner’s pretax contributions to Roth after both pretax and Roth contributions reach the 402(g) limit. This flexibility should help accommodate varied payroll systems.

Plans that accept separate elections for catch‑up contributions (“flagged” contributions) can apply a deemed Roth election per payroll period, even if the 402(g) limit has not been reached. No correction is needed if flagged contributions are later found not to be true catch‑up contributions.

Plans cannot require all catch‑up contributions to be Roth; participants not subject to the Roth catch‑up requirement must still be allowed to make pretax catch‑up contributions.

Plans without Roth contributions

Under the final rules (like the proposed ones), plans with catch‑up contributions that do not offer Roth are allowed to satisfy the Roth catch‑up requirement by prohibiting high‑wage earners from making any catch‑up contributions. However, the proposed regulations had indicated that since the wage threshold for determining who is subject to the Roth catch‑up contribution requirement is slightly lower than the wage threshold for determining highly compensated employee (HCE) status, some non‑HCEs might be impacted by this exclusion—which could impact the availability of catch‑up contributions under the nondiscrimination requirements of Internal Revenue Code Section 401(a)(4).

Accordingly, the proposed regulations would allow a plan to preclude one or more HCEs who are not subject to the Roth catch‑up requirements from making catch‑up contributions, in order to facilitate compliance with the nondiscrimination requirements.

The final regulations include a safe harbor under which a plan will be deemed to satisfy nondiscrimination requirements if the plan prohibits all catch‑up eligible participants who are HCEs—and who also have net self‑employment earnings for the preceding calendar year paid by the plan sponsor that were above the Roth catch‑up requirement wage threshold—from making catch‑up contributions. This safe harbor may be used even if a plan does not have any participants with net earnings from self‑employment for the preceding calendar year.

Flexibility to aggregate wages of related employers

When determining which employees are subject to the Roth catch‑up requirement—i.e., those with prior‑year FICA wages above the $145,000 cap (indexed for inflation)—the final regulations allow plans to aggregate wages with one or more other employers in a controlled group of corporations or that use a common paymaster. This was a welcome change from the proposed regulations, which would not have permitted wage aggregation.

Wages attributed to successor employers

The final regulations provide a safe harbor for determining the applicability of the Roth catch‑up requirement for a calendar year in which wages paid by a predecessor employer are attributed to the successor employer due to an asset purchase. The safe harbor permits plan administrators to rely on wage information reported on a Form W‑2 issued by a successor employer for the calendar year of the asset purchase.

Correcting violations of the Roth catch‑up requirements

The final regulations retain two alternative correction methods that avoid the need to distribute elective deferrals:

• The Form W‑2 method permits correction by transferring the participant’s pretax catch‑up contributions (adjusted for gains or losses) to the participant’s designated Roth account and reporting the contributions (not adjusted for gains or losses) as designated Roth contributions on the participant’s W‑2 for the year of the deferral. This is only permitted if the Form W‑2 for that year has not yet been filed or furnished to the participant.
• The in‑plan Roth rollover method permits correction through an in‑plan Roth rollover of the participant’s pretax catch‑up contributions (adjusted for gains and losses). This contribution (adjusted for gains and losses) is reported as an in‑plan Roth rollover on Form 1099‑R for the year of the rollover.

Conditions for using alternative correction methods

Plans are eligible to use the two alternative correction methods for excess deferrals and excess annual additions only if the plan has in place practices and procedures designed to result in compliance with the Roth catch‑up requirement, including providing for deemed Roth catch‑up elections.

A plan would not be required to have such practices and procedures in place in order to correct a pretax contribution that is a catch‑up contribution because it exceeds an employer‑provided limit or the actual deferral percentage (ADP) test limit.

Additional clarification on corrections

The final regulations also provide the following clarifications and changes relating to corrections:

• In‑plan Roth rollovers not otherwise required. A plan may use the in‑plan Roth rollover correction method even if the plan does not permit participants to elect in‑plan Roth rollovers.
• Applicability of the five-year recapture rule. If an in‑plan Roth rollover made to correct a Roth catch‑up violation is distributed within the five‑year period that begins on January 1 of the year in which the rollover is made, the distribution will be subject to a 10% additional tax, unless an exception applies.
• Correction method consistency. While the final regulations provide flexibility when choosing a correction method, a plan must use the same method for similarly situated participants. For example, a plan may use the W‑2 correction method for all participants for whom the Forms W‑2 have not been filed or issued and the in‑plan Roth rollover correction method for all other participants. However, a plan may not apply a correction method that is based on investment returns in participants’ accounts.
• Extended correction period. Plans now have until the end of the year following the year in which the error occurred to make corrections to avoid plan qualification issues. However, the final regulations suggest that if a participant mistakenly makes pretax catch‑up contributions over the 402(g) limit, they will be double taxed (on both the excess amount and the amount converted to Roth) if the correction is not completed by April 15 of the following year.
• $250 de minimis rule. Correction is not required if the amount of the pretax deferral that was required to be a designated Roth contribution is $250 or less.

Puerto Rico employees are exempt for now

The final regulations provide a helpful exemption for Puerto Rico employees. We know that participants in plans that are only qualified under the Puerto Rico tax code are not subject to the Roth catch‑up requirement, which resides in the U.S. tax code. The final regulations also exempt Puerto Rico participants in a dual‑qualified plan—i.e., plans that are qualified under both the U.S. and the Puerto Rico tax codes—until Puerto Rico’s tax code allows Roth contributions.