• Employees earning less than $145,000 (indexed) can continue making pre-tax or Roth catch-up contributions in 2026.
• In 2026, employees earning above the IRS threshold must make Roth catch-up contributions.
• The threshold is based on FICA wages, not the traditional HCE definition.
• Plans without a Roth option will only be permitted to allow catch-up contributions from participants with FICA wages below $145,000.
• If a plan does not allow Roth, excess contributions from failed ADP tests may need to be refunded instead of reclassified as catch-up contributions.

Significant changes to 401(k) plans are coming in 2026, and if you make age 50+ catch-up contributions, you may need to be prepared. Under SECURE Act 2.0, employees earning above a certain threshold will be required to make catch-up contributions as Roth rather than pre-tax.

One of the biggest points of confusion is how the IRS determines who must make catch-up contributions as Roth rather than as pre-tax. Many assume that the threshold is based on the traditional highly compensated employee (HCE) definition used for 401(k) nondiscrimination testing—but it’s not. Instead, the IRS uses a lower compensation limit based on FICA wages, which are often lower than HCE wages because of deductions, as we’ll explore later in the article. This means more employees will be impacted than expected.

For employers, this change isn’t just about switching to Roth—it has implications for ADP testing, plan administration, and payroll processing. If your plan does not offer Roth contributions, certain employees may lose the ability to make catch-up contributions entirely.

Here’s what’s changing, who is affected, and what plan sponsors need to do to prepare.

Catch-up contributions allow older employees to contribute more to their retirement plans beyond the standard IRS contribution limits ($23,500 in 2025). Catch up contributions begin once an eligible participant contributes more than $23,500 (2025). The permitted catch-up amount a plan participant can make depends on what age they are at the end of the calendar year:

Starting this year, employees who are ages 60-63 can contribute an extra 50% more than the standard catch-up limit, bringing their total catch-up contribution up to $11,250. However, once they turn 64, their limit drops back to $7,500. Note that these limits are for the year 2025, the IRS will announce the limits for 2026, in the fall.

Starting in 2026, the following rules will apply:

• All catch-up contributions for eligible participants earning above the IRS threshold must be made as Roth contributions.
• The IRS threshold is based on the employee’s 2025 FICA wages (IRS Code Section 3121(a)), which differs from the standard HCE definition used for nondiscrimination testing.
• If a plan does not offer Roth contributions, only eligible participants earning below the IRS threshold are allowed to make catch-up contributions. Higher earners above the IRS threshold would lose the ability to make catch-up contributions altogether if their plan does not offer a Roth.

The IRS will index or adjust the threshold periodically. For 2026, it will be based on 2025 compensation, and it is set at $145,000.

These changes apply to 401(k), 403(b), and 457(b) plans, but they do not impact standard deferrals or employer contributions.

The new Roth catch-up requirement applies only to eligible participants who:

• Earn more than the IRS wage threshold in the prior year ($145,000, subject to cost-of-living increases), AND
• Elect to make catch-up contributions to their retirement plan.

Employees earning below this threshold can still make catch-up contributions on a pre-tax or Roth basis (assuming their plan offers both contribution options).

A major source of confusion is which earnings count toward the Roth catch-up threshold.

Key Difference: The SECURE 2.0 rule uses FICA wages, which often exclude pre-tax health and welfare benefits such as employee paid medical, dental, vision, HSA/FSA contributions, etc. This is not the same as the HCE definition used for 401(k) nondiscrimination testing. Therefore, it is possible that an employee could be considered an HCE in their 401(k) plan, based on their pay, but have pre-tax health and welfare deductions which lower their FICA wages below $145,000. This means some highly paid employees could still qualify for pre-tax catch-up contributions.

Example 1: Employee Below the Threshold

• Name: Sarah, Age 50
• Total Compensation: $168,000 (including bonuses and benefits)
• Salary (FICA Wages): $140,000
• Catch-Up Contribution Election: $7,500 (pre-tax)

Sarah is an HCE under nondiscrimination testing, and her FICA wages are below the catch-up threshold, so she can continue making pre-tax catch-up contributions.

Example 2: Employee Above the Threshold – Plan offers Roth

• Name: James, Age 59
• Total Compensation: $175,000 (including bonuses and benefits)
• Salary (FICA Wages): $155,000
• Catch-Up Contribution Election: $7,500 Roth

James is an HCE under nondiscrimination testing, and his FICE wages are above the earnings threshold, therefore he must make his catch-up contribution as a Roth contribution.

Example 3: Highly Compensated Employee, Above the Threshold – No Roth option offer

• Name: Amanda, Age 61
• Total Compensation: $165,000 (including bonuses and benefits)
• FICA Wages: $146,000
• Catch-Up Contribution Election: $0

Amanda is an HCE under nondiscrimination testing, and her FICA wages are above the earnings threshold. Because her plan does not offer a Roth option, she is not allowed to make any catch-up contribution. Amanda lost out on the ability to save an additional $11,250 towards her retirement savings because her plan did not offer a Roth option.

For employers, there are several technical challenges that must be considered beyond just enabling Roth contributions.

Catch-Up Reclassification for Average Deferral Percentage (ADP) Testing

• In non-safe harbor 401(k) plans, the IRS allows highly compensated employees (HCEs) to reclassify excess elective deferrals as catch-up contributions if needed to correct a failed ADP test.
• Starting in 2026, plans that fail ADP testing cannot reclassify excess deferrals as catch-up contribution for employees earning over $145,000 – unless the plan allows Roth. Implication: If re-classification is not possible, the plan would need to consider either returning excess contributions to the impacted HCEs or make a Qualified Non-Elective Contribution (QNEC) to Non-highly Compensated Employees (NHCEs) to correct an ADP testing failure.

Safe Harbor Plans and the Roth Catch-Up Requirement

• Safe harbor 401(k) plans automatically satisfy the ADP test, so reclassification of contributions typically isn’t needed.
• However, if the plan does not offer Roth contributions, HCEs earning above the wage threshold would not be able to make catch-up contributions at all.

1. Check if your plan offers Roth contributions.

• If not, consider adding a Roth feature before 2026, otherwise, the only plan participants that will be permitted to make catch-up contributions will be those with FICA wages below $145,000.
• Plans that fail ADP testing may no longer be able to reclassify excess contributions as catch-up contributions if Roth is not available. In this case, excess amounts would have to be refunded, potentially creating unexpected tax burdens for HCEs.

2. Review your plan’s ADP test results (if applicable).

• If your plan frequently fails nondiscrimination testing, consider:
  • Switching to a safe harbor design to eliminate ADP testing requirements OR
  • Enabling Roth contributions to preserve the ability to reclassify excess contributions as catch-up contributions (as an option in addition to a QNEC to correct the ADP failure).

3. Coordinate with your recordkeeper and third-party administrator (TPA).

• Ensure that catch-up reclassification processes align with the new rules.
• If your plan does not currently allow Roth contributions, verify whether you need to amend your plan document before 2026.

4. Educate employees on these changes.
   • Employees may need to adjust saving strategies if they are impacted by these changes.