By Fred Reish
The New Rule and How It Works
The requirement that catch-up contributions for higher-paid participants be treated as Roth contributions takes effect for plan years beginning in 2026. Because most plans operate on a calendar year, this overview assumes a January 1, 2026, effective date.
The IRS issued its final regulations on September 16, 2025, and provided a limited transition period. “Good faith” compliance will be acceptable for 2026, but full compliance will be required starting in 2027. Even so, the most prudent approach is to aim for full compliance as of January 1, 2026.
Under the new rule, all catch-up deferrals made by higher-paid employees will be taxable — meaning they must be made as after-tax Roth deferrals. There are no exceptions. As a result, plan sponsors must make decisions and communicate them to employees this year.
Two main options exist:
- Add Roth accounts to the plan
If a plan does not currently offer Roth deferrals, it must be amended to include a Roth feature.
While technically only higher-paid participants need access to Roth catch-up contributions, in practice most plan sponsors will extend Roth deferral eligibility to all participants.
Importantly, plan sponsors cannot require all participants (including lower-paid employees) to make their catch-up contributions as Roth deferrals. Non-higher-paid employees must continue to have the option to choose between traditional pre-tax and Roth catch-up contributions.
If a Roth feature is added:
- Coordinate with the plan’s recordkeeper and payroll provider to ensure proper setup and reporting.
- Develop participant education materials and updated election forms before year-end.
If the plan already allows Roth deferrals, no amendment is needed. However, starting in 2026, the catch-up contributions of higher-paid employees must automatically be treated as Roth contributions.
- Prohibit catch-up contributions for higher-paid employees
If a plan sponsor decides not to add a Roth feature, higher-paid participants will lose the ability to make catch-up contributions in 2026 and beyond.
This is a significant limitation, as it restricts retirement savings opportunities for these employees. Sponsors choosing this route should communicate clearly and early so affected participants can maximize their catch-up contributions in 2025.
Action steps for plan sponsors
To prepare for the 2026 effective date, plan sponsors should take these steps before year-end:
- Decide: Determine whether to add a Roth feature if one does not already exist.
- Communicate: Notify higher-paid employees about upcoming changes, especially if catch-up contributions will be discontinued.
- Coordinate: Work with recordkeepers and payroll providers to ensure systems are ready to correctly handle Roth catch-up contributions.
- Educate: Provide clear materials explaining the change and its impact on savings options.
- Clarify: Distribute new deferral election forms so participants can adjust their contributions accordingly. If higher-paid employees do not update elections, existing forms may be used if proper notice was given.
Final thoughts
This new Roth catch-up requirement introduces complexity — and potential compliance pitfalls — but also offers an opportunity to expand employees’ understanding of after-tax savings and diversify their retirement strategies.
By acting now to make decisions, update systems and communicate proactively, plan sponsors can ensure a smooth transition into compliance — and help employees make informed choices for their financial future.
For a comprehensive summary of key issues and decisions for plan sponsors, download Catch-Up Contributions for Higher Paid Employees Must Be Roth in 2026 and Beyond.
HUB Retirement and Private Wealth offers institutional and retirement services to for-profit and not-for-profit organizations and customized private wealth management services to individuals and families. Employees of HUB International offer securities through partner broker-dealers not affiliated with HUB. Employees of HUB provide advisory services through both affiliated and unaffiliated Registered Investment Advisors (RIA). Global Retirement Partners, LLC, HUB Investment Advisors, TCG Advisors, Millennium Advisory Services, and Taylor Advisors are SEC-registered investment advisors and wholly owned subsidiaries of HUB International.
This content was authored by Fred Reish, a partner with the law firm of Faegre Drinker that specializes in retirement law, focusing on fiduciary and best interest standards of care, prohibited transactions, conflicts of interest and retirement plans. The views expressed in this article are those of Fred Reish, and not necessarily of Faegre Drinker or HUB International.
The article is for general information only and is not intended to provide investment, tax or legal advice, or recommendations for any situation. Please consult with a financial, tax or legal advisor on your circumstances. HUB International and Faegre Drinker are not affiliated entities.
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