The Internal Revenue Service (IRS) has released final regulations that will bring significant changes to catch-up contribution provisions under the Internal Revenue Code. This guidance stems from the SECURE 2.0 Act of 2022, which set the stage for these alterations to take effect.
Starting January 1, 2026, participants in certain retirement plans with FICA wages exceeding $145,000 from the previous year will be mandated to make catch-up contributions as designated Roth contributions. This requirement specifically applies to 401(k) plans, 403(b) plans, and eligible governmental 457(b) plans, while excluding others such as SEP arrangements and SIMPLE IRA plans.
The implementation of these changes is complex, making it essential for plan sponsors to collaborate closely with internal resources, payroll providers, and recordkeepers to ensure compliance.
The final regulations detail various applicability dates depending on the type of plan. For plans not associated with collective bargaining agreements, compliance is required starting January 1, 2027. For those maintained under collective bargaining agreements, the effective date will depend on the timeline of both the first taxable year post-2026 and the expiration of the last agreement in effect as of December 31, 2025. Governmental 457(b) plans must comply by the beginning of the taxable year following both December 31, 2026, and the closure of the first regular legislative session of the governing body after December 31, 2025.
Originally targeted to commence on January 1, 2024, these regulations received a two-year transition period, but no further extensions will be provided. As a result, plans must implement a good faith interpretation of the Roth catch-up requirements for the interim period prior to full compliance with the final regulations.
Affected participants include those aged 50 or older during the calendar year, whose FICA wages from the previous year exceeded the stipulated threshold, and who are making salary deferrals over the limit defined by the Code. The IRS has clarified that FICA wages represent wages subject to Social Security taxation, and participants not earning such wages won’t be subject to the Roth catch-up contribution requirement.
Additionally, the final regulations address the aggregation of FICA wages for employees working in a controlled group or under a common paymaster, ensuring that all wages within such groups can be combined to determine if the threshold is met.
Plan documents may also allow deemed elections, in which a participant opting for pre-tax catch-up contributions can be treated as choosing Roth contributions instead. Plans must facilitate the modification of these deemed elections and must promptly discontinue them if a participant no longer meets the eligibility criteria.
This regulatory change emphasizes the complex landscape of retirement plan compliance and the need for vigilant oversight by plan sponsors and participants alike. As the January 2026 deadline approaches, proactive measures will be necessary to navigate the new requirements effectively.
