Many employers sponsor Section 401(k) Plans to help employees save for retirement by allowing them to contribute a portion of their pay into the Plan. Each year, the Internal Revenue Service announces the maximum employee contribution amount for the upcoming calendar year. Beginning in 2025 there are three separate employee salary deferral (i.e., contribution) limits: the regular limit, the Age 50 Catch-up Limit, and a Super Catch-up Limit for employees turning age 60 to 63 during year.
Through the end of 2025, Catch-up or Super Catch-up Contributions may be made on either a pre-tax basis or a Roth (after-tax) basis. Pre-tax contributions are subject to employment taxes (e.g., Social Security tax) but not income taxes for the year they are made. Roth contributions are subject to both employment taxes and income taxes for the year they are made. The tax treatment for distributions of pre-tax salary deferrals and Roth deferrals is different.
Pre-tax contributions and related earnings are subject to income tax when they are withdrawn by the employee. Roth contributions and related earnings are generally not subject to income tax when withdrawn, provided that:
- The Roth contributions are separately tracked under the Plan;
- The distribution occurs after a 5-Year Holding Period measured from the first date a Roth Salary deferral is made to the Plan; and
- The employee is at least age 59 ½ at the time of distribution.
Important Changes Starting January 1, 2026
Starting on January 1, 2026, all Catch-up and Super Catch-up contributions by any Catch-up Eligible Participant who earned $150,000 or more in FICA wages in 2025 (a “Roth Catch-up Eligible Participant”) must be made on a Roth basis. FICA wages are those wages reported in Box 3 on Form W-2. Failure to comply with this requirement may result in disqualification of the 401(k) Plan for tax purposes.
If your 401(k) Plan does not currently allow Roth salary deferrals, Roth Catch-up Eligible Participants will not be able to make Catch-up or Super Catch-up Contributions in 2026.
Action Steps:
- Amend your Plan to allow Roth salary deferrals if not currently allowed, so Roth Catch-Up Eligible Participants can make Catch-Up and Super Catch-Up Contributions.
- Identify employees likely to earn $150,000 or more in FICA wages in 2025.
- Confirm that your payroll service provider is prepared to track deferrals made by Roth Catch-up Eligible Participants and correctly designate catch-up contributions as Roth, even if the Roth Catch-up Eligible Participant does not affirmatively elect Roth treatment.
- Ensure collaboration between your payroll provider and Plan recordkeeper to meet the mandatory Roth Catch-Up requirements in 2026.
- Prepare your administrative team to provide timely and accurate information to your payroll provider and recordkeeper.
- Consult your attorney to evaluate the pros and cons of adding a deemed Roth election provision to your 401(k) Plan.
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