Starting January 1, 2026, Section §603 of SECURE Act 2.0 takes effect, requiring employees aged 50+ who earned $145,000 or more in FICA wages during 2025 to make all catch-up contributions as post-tax Roth contributions.
This is one of the most impactful provisions of the Act, yet with just four months to go, many employers still lack clarity on how it will work or what to tell employees, while compliance may carry unexpected audit and litigation risks if not handled carefully. To help, we’ve created a step-by-step guide.
What are service providers (recordkeepers) planning to do?
After speaking with several of the largest recordkeepers in the country, their planned approach to helping companies administer this new rule seems fairly universal:
- Flag accounts: Later this year, they will ask companies to provide a spreadsheet of employees who will (or are expected to) clear $145k in FICA wages in 2025 so accounts can be flagged
- Warn participants: Flagged accounts are likely to see messaging on the contribution election section of the recordkeeper’s app or site that reads “any catch-up dollars will be contributed as Roth”
- Alert employer if threshold will be crossed: If an employer is about to upload a payroll file which could cause a flagged participant to exceed the standard contribution limit ($23,500 in 2025) with pre-tax dollars, a warning would appear so the employer can adjust the upload
These responses don’t explain how an employee wanting to make catch-up contributions should set up their election on the recordkeeper’s site or app. Should flagged participants create both pre-tax and Roth elections? Switch from pre-tax to Roth during the year? Will they be notified when to do so?
Surprisingly, the general answer has been for participants just keep doing what they’ve always done. If that means only pre-tax contributions, then employers must work with their payroll provider to ensure the new rules are followed.
What are payroll providers planning to do?
Most major payroll providers have communicated that they intend to similarly flag accounts (like the recordkeepers), track the YTD contributions for flagged employees, and when a flagged account has a pre-tax election on file with the recordkeeper, “switch” the employee’s contribution in the payroll system to Roth, once the standard contribution limit is reached.
Why Auditors May Take Issue
One of the key things auditors examine is the tie between what an employee is elected to contribute to their account (on the recordkeeping system) and what is actually deposited into their account (from the payroll system). Therefore, based on what recordkeepers are planning to do and what payroll providers are planning to do, there is no tie from an audit standpoint, contribution elections on file with the recordkeeper, won’t match the actual deposits going into the employee’s account.
Let’s take an example of a 55-year-old participant who makes $221,500 annually and wants to max out their 401(k) contribution ($23,500 + $7,500 catch-up = $31,000).
- The participant determines their contribution percentage is 14% ($31,000 / $221,500 = 14%)
- The participant elects a 14% pre-tax contribution in the recordkeeping system
- A 14% pre-tax contribution is reported back to the payroll system
- The payroll system contributes $23,500 for this participant pre-tax, then switches the participant’s remaining $7,500 contribution to Roth
- The auditor selects this participant for examination – they find a 14% pre-tax contribution election on file with the recordkeeper, but the money deposited into the account is both pre-tax ($23,500) and Roth ($7,500). The contribution election (pre-tax) and the deposits (pre-tax and Roth) don’t reconcile.
Generally, when things don’t reconcile, there is a finding in the audit. It is possible that an auditor may not note the finding, however, to date, no official guidance to that effect has been issued by AICPA, Department of Labor, or the IRS.
Litigation Risk?
Given the sharp rise and evolution of claims in recent forfeiture cases, it’s not a stretch to imagine an ambitions plaintiffs’ attorney claiming that breaches have occurred in response to how this is unfolding. Misalignment between election and actuality (even with the disclaimer) and a monetary angle (the payment of the taxes at potentially high tax rates), creates gray area for future cases. Therefore, compliance should be approached thoughtfully and proactively.
Steps to Compliance + Employee Communication
Step 1: Start with your recordkeeper. Ask if they will be needing a spreadsheet to flag accounts (this will also help you identify impacted employees). Ask if they will be providing disclaimer language on the contribution election page of the website and app. Ask for a copy of the exact language so you can include it in employee messaging. Document the responses.
Step 2: Reach out to your payroll provider. Ask if they will automatically flag accounts or if you need to do that. Ask if they will automatically “switch” contribution deposits from pre-tax to Roth, even if the only contribution election on file in the payroll system is pre-tax. Document their responses.
Step 3: If your plan is an audited plan, reach out to your auditors and explain how things will work in your plan, with respect to steps 1 and 2; ask if they see any issues administering things this way from an audit standpoint. Document their responses.
Step 4: Prepare employee communications. Consider using examples, like the above story of the 55-year-old person. Retain copies of any communications and document who received communications, attend webinars, in-person meetings, etc. Don’t forget to be mindful of the new, varying levels of permitted catch-up contributions, based on age, which went into effect in 2025. Perhaps go a bit farther than you would for general §404(c) compliance.
Factors that Can Make this More Complicated
Aspects of a plan’s setup could complicate the administration of this rule. For example, payroll integration (i.e. misalignment between systems), partial payrolls (how are splits addressed), year-end pay spikes (i.e. bonuses if included in plan compensation), payroll frequencies (crossover at year-end), matching contributions (if certain deferral or compensation types are excluded), and plans setup with multiple contribution election options (i.e. separate elections for standard contributions, catch-up contributions, bonus contributions, etc.).
While most individuals wishing to make catch-up contributions won’t realistically be pushing dollars into that territory until mid to late 2026, a proactive approach now should be considered warranted, so contribution elections can be correctly and confidently set by employees, going into 2026.
We understand these rules are complex and should you need any help at all, please don’t hesitate to reach out to an Aldrich Wealth Retirement Plan Consultant.
Disclosure: This content is for informational purposes only and not investment advice.
