The Roth catch-up rule took effect in January 2026, but for many employers, compliance is only now becoming real. As 2025 bonuses are paid and higher-compensated employees begin to hit the catch-up contribution limit, payroll and recordkeeping systems are being tested in real time.
If your 401(k) or 403(b) plan allows catch-up contributions, employees whose prior-year wages from the plan sponsor exceeded the IRS threshold ($150,000 for 2025) must make all catch-up contributions on a Roth (after-tax) basis. Pre-tax catch-up contributions are not permitted for these employees.
For many plans, the first catch-up contributions may occur in February or March, often triggered by bonus payments. That is when errors are most likely to surface if systems are not correctly configured.
What Employers Should Consider Doing Now
- Confirm your plan permits Roth deferrals. Without Roth, catch-up contributions for affected employees cannot be made.
- Revisit employee communications. Employees may be surprised when pre-tax catch-up contributions stop or are redirected to Roth.
- Confirm affected employees. Confirm payroll and the plan’s recordkeeper have correctly identified affected employees using prior-year wages from the plan sponsor.
- Verify payroll and recordkeeping systems. For affected employees:
- If the employer elected to use deemed Roth catch-up elections, catch-up contributions should automatically be routed to Roth.
- Pre-tax catch-up contributions must be blocked
- If the employer elected to zero out pre-tax catch-up elections, ensure the system applies that zeroing out automatically.
- Monitor early payrolls carefully. Review bonus and early-year payrolls to confirm Roth catch-up contributions are being processed correctly.
Because these errors often occur early in the year and can compound across multiple payrolls, prompt identification and correction are critical to minimizing correction costs and reducing the risk of more significant compliance issues later in the year. If errors do occur, such as allowing pre-tax catch-up contributions for employees who should have been limited to Roth, employers should act quickly and work with their recordkeeper and counsel to correct them using established IRS correction principles.
