Beginning in 2026, certain participants will be required to make their catch-up contributions on a Roth (after-tax) basis. Below is a breakdown of the upcoming change and how it affects employees and employer plans.

Effective Dates: Law vs. Regulatory Compliance

The statutory requirement goes into effect January 1, 2026. However, the IRS has provided additional time for plans to fully meet the administrative requirements, giving employers until January 1, 2027 to fully comply with the final regulations.

This means:

• 2026 is effectively a transition year, where plans must apply the law but have some operational flexibility.
  
  
• 2027 marks the official enforcement year, when full compliance is required for most plans.

Who Is Affected: The High-Earner Test

The new Roth catch-up mandate applies only to employees who exceed a certain prior-year wage threshold. Specifically:

• The employee must have prior-year W-2 Box 3 wages over $150,000 (indexed annually).

If a participant crosses this threshold, all catch-up contributions in the following year must be treated as Roth contributions.

Employees below the threshold can continue choosing between pre-tax or Roth catch-up contributions, depending on what the plan allows.

What Changes for 2026 and Beyond

Beginning in 2026:

• High-earning employees cannot make catch-up contributions on a pre-tax basis.
  
  
• All catch-up contributions for these individuals must be Roth (after-tax).
  
  

• The base salary-deferral limit is not affected—only the catch-up portion is subject to the mandate.
  
  
• Applies to employer-sponsored 401(k), 403(b), and governmental 457(b) plans.
  
  

This applies to both:

• The standard age-50+ catch-up
  
  
• The special “super” catch-up for ages 60–63
  
  

How the Rule Applies to New Employees

A critical nuance: new employees are never affected in their first year. Because the rule is based on prior-year wages with the same employer, new hires have no prior compensation to count toward the threshold.

In some cases:

• A new employee may also be exempt in their second year if their prior-year wages (with that employer) fall below the indexed threshold.
  
  
• There is no prorating of the wage threshold for partial-year employment.
  
  

This can create unique planning opportunities and timing considerations for high earners changing jobs.

If the Plan Does Not Offer A Designated Roth

A surprising consequence of the new law is what happens when an employer plan does not include a Roth contribution feature:

• High-paid employees cannot make catch-up contributions at all.
  
  

The plan must add a Roth option if it wants to permit catch-up contributions for employees who exceed the wage threshold.

The Planning Upside

While some high earners may initially view the loss of pre-tax deferral as a disadvantage, the Roth requirement actually creates significant long-term value. Making catch-up contributions on a Roth basis can provide:

• More tax-free income in retirement, helping smooth income levels over time
  
  
• No impact on Social Security taxation, since Roth withdrawals don’t raise provisional income
  
  
• No effect on Medicare IRMAA brackets, protecting against higher Part B and D premiums
  
  
• No required minimum distributions (RMDs) for Roth 401(k) and Roth IRA assets
  
  
• Tax-free inheritance for beneficiaries, subject to the 10-year rule, often resulting in lower lifetime tax cost
  
  
• Diversification of tax buckets, giving retirees greater flexibility and control in later years
  
  

In short, while the tax payment shifts earlier, the long-term planning advantages—especially for high-income clients—remain substantial.

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