SECURE Act 2.0 introduces new rules applicable to 401(k) plan catch-up contributions that will take effect in 2026. This Alert provides a brief explanation of catch-up contributions and actions which plan sponsors and employers need to take now to address this change in the law.
Participants in a 401(k) plan who are age 50 or older by the end of the calendar year can make “catch-up contributions” if they have made their maximum 401(k) contributions for the year. In 2025, the 401(k) contribution is limited to $23,500. The maximum catch-up contribution in 2025 is $7,500, with an exception for participants ages 60-63 whose catch-up contribution limit in 2025 is $11,250. These dollar amounts are subject to cost-of-living adjustments.
In 2025, 401(k) and catch-up contributions can be made either on a pre-tax basis or after-tax as a Roth contribution. Investment earnings on both types of catch-up contributions are tax-deferred while they remain in the plan. However, pre-tax catch-up contributions and investment earnings are taxable as ordinary income when pre-tax catch-up contributions are distributed (although the timing of the payment of the tax can be further deferred by rolling over these amounts). Roth catch-up contribution and investment earnings are tax-free when distributed on retirement.
Section 415 of the Internal Revenue Code limits the maximum annual additions to a participant’s account under defined contribution plans (which include 401(k) plans). The annual addition limit in 2025 is the lesser of 100% of a participant’s compensation or $70,000. Although 401(k) contributions and employer matching and profit-sharing contributions are among the amounts that are treated as part of a participant’s annual addition, catch-up contributions are not. Accordingly for 2025, the maximum amount which can be allocated for a 401(k) plan participant age 50 or older is $77,500 (i.e., a maximum annual addition of $70,000 plus catch-up contributions of $7,500). For a participant between the ages of 60-63, the maximum is $81,250 (i.e. a maximum annual addition of $70,000 plus catch-up contributions of $11,250).
Beginning January 1, 2026, catch-up contributions by a participant whose FICA wages (in Box 3 on Form W-2) during the preceding calendar year are more than $145,000 (a “high earning participant”) must be made as Roth catch-up contributions. In determining if an employee is a high earning participant, a plan can provide for the aggregation of FICA wages paid by the participant’s common law employer with wages paid to that employee by related employers in the same controlled group but this is not required.
With very limited exceptions, 401(k) plans are not required to comply with final IRS regulations until January 1, 2027 and have until December 31, 2026 to adopt necessary plan amendments. However, for 2026, a plan sponsor must apply a good faith interpretation of the law and proposed IRS regulations. Accordingly, plan sponsors should now determine how they will implement this change next year. The following compliance options are available to 401(k) plans that currently permit catch-up contributions:
- Eliminate all catch-up contributions. The downside of using this approach is that it will reduce employee savings opportunities.
- Eliminate Roth catch-up contributions. Participants who are not high-earning participants will continue to be able to make pre-tax catch-up contributions. However, high-earning participants would not be permitted to do so.
- Prohibit catch-up contributions by any high-earning participant who has not made a timely election to have catch-up contributions treated as a Roth catch-up contribution.
- Automatically deem catch-up contributions by high-earning participants as Roth catch-up contributions. To use this option, all high-earning participants must be given the opportunity to make a new salary deferral election with respect to their catch-up contributions – e.g., they can elect not to make any catch-up contributions. If a catch-up contribution is mistakenly treated as a pre-tax catch-up contribution, a plan using this deemed Roth contribution approach can correct this mistake by transferring the erroneous pre-tax contribution (plus earnings) to the participant’s Roth account. If the error is discovered before Form W-2 for the year is issued, the amount transferred to the participant’s Roth is reported as taxable income on the participant’s W-2. If the participant’s W-2 has been issued, a 1099-R is issued to the participant for the amount transferred. In each case, the amount transferred is taxable income to the participant, but no withholding is required by the plan or the employer. Importantly, only plans which use the deemed Roth Contribution approach can use these two correction methods.
Under any of the foregoing, employers will need to review their payroll system to confirm that it can track each participant’s prior year FICA wages to determine high earning participants and also accurately classify catch-up contributions by a high earner.
