Compliance Corner: Q2 2025 – Roth Catch-Up Rules & Upcoming Deadlines
Upcoming Deadlines
The Administrators at H&S Administrators are working hard to complete 2024 Plan Year administration for calendar year plans. If you have received a request for missing or additional information from your H&S Plan Administrator, please respond as soon as possible so that we can complete necessary administrative tasks in a timely manner. If you are an audit size plan, you should have already engaged an audit firm for the 2024 plan audit.
Upcoming compliance deadlines for 2024 calendar year plans:
July 31st – Deadline to file Forms 5500 and 5330 or request an extension (Form 5558).
September 15th – Deadline for money purchase and defined benefit plans to make required contributions. Deadline for deductible employer contributions for partnership and S-Corp 401(k) plans on extension.
October 15th – Deadline to file Form 5500 on extension.
New Roth Catch-Up and Super Catch-Up Requirements for 2026
As discussed in a prior Compliance Corner, the rules for catch-up contributions are changing for certain participants starting with the 2026 plan year. In anticipation of this new requirement, many of our Plan Sponsors have received correspondence from their recordkeeping platform indicating a timeline to adopt a Roth deferral option if one is not currently available for the plan. These communications have generated a lot of questions surrounding the rules for catch-up contributions after SECURE 2.0.
A brief background helps to explain the changes. Prior to SECURE 2.0, all participants 50 and older were eligible to make catch-up contributions to 401(k) and 403(b) plans in addition to the annual deferral limit. The catch-up limit is indexed annually for inflation and currently allows an additional contribution of up to $7,500 for 2025. Since the catch-up limit is applicable to all participants over age 50, most payroll providers and systems can easily track and manage these contributions. However, the addition of two significant changes to the catch-up rules has caused additional compliance requirements for Plan Sponsors and may require an amendment to your plan to make sure all participants have an opportunity to use catch-up contributions to increase retirement savings.
1. Mandatory Roth Catch-Up
The most significant change from the SECURE 2.0 legislation is a new requirement, effective January 1, 2026, that participants with FICA wages of more than $145,000 in the prior year make such contributions as Roth (post-tax) contributions. This new income limit is not used for any other purpose and is therefore an additional compliance item for Plan Sponsors to track. The income limit is indexed for inflation and is subject to adjustment from year to year. Though technically already in effect, the IRS delayed implementation of the Roth catch-up limits for a two-year period following passage of SECURE 2.0 to allow service providers and employers time to put systems in place to administer the new limits. The IRS extension expires at the end of 2025.
In January 2025, the IRS issued proposed regulations clarifying certain aspects of the new catch-up rules. One unusual change is that only participants with more than $145,000 in FICA wages are subject to the Roth requirement. This means that certain self-employed participants enjoy a loophole to continue contributions notwithstanding the income limits where income is not reported as a taxable wage via a W-2. As an example, self-employed individuals typically report income on Schedule C (Form 1040) or on Schedule K-1 (Form 1065). The proposed regulations indicate that these individuals are not subject to the Roth requirement because their income is derived from self-employment rather than FICA wages even though such individuals may have W-2 employees that are limited in the type of catch-up contributions because of income in excess of the limit. In another complication, the indexed income limit is determined per qualified plan and is not aggregated between related employers like most other limits. For employers in a controlled group of businesses this will mean a review of the pay received by an employee from each individual employer rather than the amount received in aggregate to determine if Roth catch-up is required for a particular employee.
Another issue addressed in the proposed regulations is the impact on plans that do not currently offer Roth deferrals. Typically, features such as catch-up contributions must be made available to all plan participants to avoid unfairly discriminating in the availability of benefits. The nondiscrimination requirements of ERISA caused confusion as to whether plans must offer a Roth option to retain the ability for all participants to make catch-up contributions. The IRS has now clarified that Plan Sponsors are not required to allow Roth catch-up contributions but if the plan does not contain a provision to allow Roth deferrals any employee subject to the mandatory Roth catch-up rules from 2026 onward will no longer maintain the ability to make catch-up contributions. To avoid this result, many recordkeeping platforms are currently updating plans in waves to add a Roth deferral option for participants in an effort to preserve the catch-up contribution option for all participants. If you receive one of these communications, please contact your H&S Plan Administrator because this change also requires an amendment to the plan document to permit Roth deferrals and avoid an operational failure.
A final issue for Plan Sponsors is what to do about participants that erroneously make catch-up contributions on a pre-tax basis if they earned more than $145,000 in the preceding year. The proposed regulations provide two methods for correcting a failure to make catch-up contributions as Roth. The first method is to transfer the pre-tax deferrals to the participant’s designated Roth account and reflect the Roth contribution on the participant’s W-2 for the year of the deferral. This will result in the inclusion of the pre-tax deferrals that were transferred to the Roth account in the participant’s gross compensation for the applicable year. However, this method requires that the plan recognize and correct the erroneous pre-tax deferrals in time to issue a W-2. Alternatively, a plan may correct the pre-tax deferral using an in-plan Roth rollover of the pre-tax amount with an adjustment for gains and losses and report the transfer on Form 1099-R for the year of the rollover. The Roth rollover amount is includible in the gross income of the participant for the year when the rollover occurs.
2. Super Catch-Up for Certain Eligible Participants
As if the catch-up rules were not complicated enough, SECURE 2.0 added a new group of participants eligible for a higher catch-up limit than what is typically available. Colloquially referred to as a “super catch-up,” the new provision allows those between the ages of 60–63 to make a contribution equal to the greater of $10,000 or 150% of the applicable limit. This means that a 63-year-old individual can make a catch-up contribution of $11,250 for the 2025 plan year in addition to the $23,500 annual deferral limit. If this same individual were 64 instead of 63 during the applicable year, the applicable catch-up limit would revert back to the lower limit applicable to those aged 50 and older of $7,500 for the 2025 calendar year.
To address questions regarding how the super catch-up is administered, the proposed regulations clarify that the higher limits are only available to those who are within the age range for the calendar year. This means that an individual who will turn age 64 in a calendar year is not eligible for the super catch-up contribution for any portion of that year. Another point clarified in the proposed regulations is that mandatory Roth catch-up also applies to these increased amounts. Therefore, a participant eligible for both regular catch-up and super catch-up amounts but with FICA wages exceeding $145,000 in the prior year must make all catch-up amounts as Roth contributions.
Disclaimer: This content is for informational purposes only and does not constitute legal, tax, or financial advice.
Written by: Sam Dart, on behalf of Hunnex & Shoemaker’s