New Retirement Rule Mandates Roth Catch-Ups for High Earners Starting in 2026

WASHINGTON — A significant change to retirement savings rules, initially slated for 2024, will now take effect on January 1, 2026, requiring high-earning employees aged 50 and over to make their 401(k) catch-up contributions on an after-tax Roth basis. The provision, part of the broad SECURE 2.0 Act of 2022, was formally delayed by the Internal Revenue Service, giving businesses and plan administrators a two-year transition period to adapt to the new mandate that eliminates the option for a pre-tax deduction on these specific contributions.

This change represents a significant shift in retirement savings strategy for a key demographic, moving from a focus on immediate tax deduction to one of future tax-free growth. For business owners and executives who fall into this category, this requires a new level of proactive financial and tax planning to navigate the long-term implications.

The rule specifically targets retirement plan participants who have turned 50 and whose prior-year wages from their employer exceeded $145,000. This wage threshold is indexed to inflation and will likely be higher by the time the rule is implemented. Under current law, employees 50 and older can contribute an additional amount to their retirement plans beyond the standard limit. For 2024, this “catch-up” contribution is capped at $7,500. Traditionally, participants could choose whether to make these contributions on a pre-tax basis, which lowers their current taxable income, or a Roth basis, which offers no upfront deduction but allows for tax-free withdrawals in retirement.

Beginning in 2026, that choice will be eliminated for high earners. All of their catch-up contributions must be designated as Roth contributions. The primary driver for this legislative change is federal revenue. By forcing these contributions into Roth accounts, the government collects income tax on that money immediately, rather than deferring the revenue until the funds are withdrawn decades later. For an individual in a 35% combined federal and state tax bracket, the loss of the pre-tax option on a $7,500 contribution means an increase in their current-year tax liability of over $2,600.

In our experience, the decision between pre-tax and Roth contributions is rarely simple and depends heavily on an individual's entire financial picture, including business income, investment strategies, and estate planning goals. This new mandate removes that choice for catch-up contributions for a specific group, making strategic financial planning even more critical. We advise clients to analyze their projected retirement income and tax rates to understand the full long-term impact. This is a core part of the tax preparation and compliance services C&S Finance Group LLC provides at csfinancegroup.com, ensuring business leaders are not caught off guard by these regulatory shifts.

The implementation of this rule poses a significant administrative challenge for employers, particularly small and mid-sized businesses. Companies that sponsor 401(k), 403(b), or governmental 457(b) plans must now establish systems to track the prior calendar year's wages for every employee eligible to make catch-up contributions. Their payroll systems must be able to correctly identify affected employees and ensure their catch-up elections are directed to a Roth account.

A critical complication is that if a company’s retirement plan does not currently include a Roth contribution feature, it must be amended to add one. Otherwise, high-earning employees at that company will be unable to make any catch-up contributions at all, effectively losing a valuable retirement savings tool. This requirement prompted significant concern from plan sponsors and industry groups, who cited the technical and administrative hurdles of implementing such changes by the original 2024 deadline.

These concerns were amplified by a drafting error in the original SECURE 2.0 legislation that appeared to inadvertently eliminate all catch-up contributions—both pre-tax and Roth—starting in 2024. In response to widespread industry feedback, the IRS issued Notice 2023-62 in August 2023. The notice clarified that the drafting error would be corrected and, more importantly, announced a two-year “administrative transition period,” officially pushing the start date for the Roth catch-up mandate to January 1, 2026.

The two-year delay was a necessary reprieve for businesses, many of whom were unprepared for the administrative complexity of tracking wages and potentially adding a new Roth feature to their plans. Our view is that companies should use this time not just to become compliant, but to re-evaluate their entire benefits package as a tool for attracting and retaining the senior talent who will be directly affected by this rule.

Employers and plan administrators are expected to use the remainder of the transition period to update their systems, amend plan documents where necessary, and communicate the upcoming changes to their workforce. As the 2026 implementation date approaches, businesses will need to monitor the inflation-adjusted wage threshold annually and ensure their payroll and retirement plan processes are fully compliant with the new requirements.