Our winter alert addresses some of the retirement and welfare benefit changes that have been of most concern to our clients.
Key 2026 Benefits Related Limits
Roth Required Catch-Up Contributions Are Here
Dealing With Retirement Plan Operational Problems
Coming Soon . . . Retirement Plan Amendments
HIPAA Notice Of Privacy Practices Updates By February 16th
Training Reminders
Key 2026 Benefits Related Limits
Roth Required Catch-Up Contributions Are Here
After being postponed for two years, the mandate that catch-up contributions made by certain higher paid employees be treated as Roth contributions is finally here. Beginning in 2026, employees who are catch-up eligible (at least age 50 by year-end) and who earned more than $150,000 in FICA wages (Box 3 of Form W-2) in 2025 with the plan sponsor or its affiliates (“Affected Participants”) must have any elective deferral catch-up contributions treated as Roth (after-tax) rather than traditional (pre-tax) contributions. Affected Participants may continue to make regular elective deferral contributions (up to the annual limit of $24,500 for 2026) on either a traditional (pre-tax) or Roth (after-tax) basis.
Remember To Index: In November, the Internal Revenue Service confirmed that the lookback year FICA amount for 2026 is $150,000, not $145,000. Be sure to confirm that your payroll and recordkeeping systems are using the right amount.
Good faith compliance. There is a lot to implementing this new requirement. To the extent there is any good news, it is that plan sponsors and plan administrators are in a “good faith” compliance period in 2026 with the final regulations only becoming effective in taxable years beginning after December 31, 2026. (The final regulations apply to governmental and collectively bargained plans at a potentially later effective date.) That said, following the roadmap laid out by the final regulations this year is highly recommended.
Implementation basics. As a reminder, elective deferrals, which include 401(k) and 403(b) contributions, may or may not be treated at the time deferred as “catch-up” contributions. While elective deferrals in excess of the annual limit ($24,500 for 2026) will always be treated as catch-up contributions when contributed, catch-up contributions can also be determined after year-end as a result of a testing failure (the ADP test), a limit failure (such as I.R.C. § 415(c) excess annual additions) or a limit imposed under the plan document (participants may only defer up to x% of compensation). That means that this cannot be solely a payroll issue or solely a recordkeeping issue. If the plan sponsor knows an amount is a catch-up contribution at the time of contribution (elective deferral contributions in excess of $24,500 for example), the plan sponsor is required to treat the elective deferrals as Roth going into the plan and the amount (subject to applicable income tax withholding) is reported as taxable on Form W-2. Otherwise, it is the responsibility of the plan administrator to ensure compliance. This can involve: (1) distributing the catch-up contributions if they should be Roth but were not contributed on a Roth basis; (2) recharacterizing the amount and reporting it as Roth on a Form W-2, but only if the W-2 has not yet been issued to the participant; or (3) recharacterizing and reporting the amount as an in-plan Roth conversion on Form 1099-R. Each approach has pros and cons. The final regulations also provide a $250 de minimis exception.
Update Recordkeeper Feed: Recordkeepers may not have historically received Box 3 (FICA) wages or received enough payroll detail to be able to calculate that amount. If recordkeepers are not receiving this information now on a periodic basis, this information will likely need to be passed to them in early 2027 as part of the 2026 testing process. Alternatively, recordkeepers may expect to simply receive a flag that indicates whether or not a participant is an Affected Participant. This flag could be passed during the year or as part of year-end testing. Either way, ensuring that the recordkeeper receives this additional information will be critical to ensuring that this new requirement is satisfied.
For most clients, all of this is reasonably straightforward (in theory at least). The biggest decisions have tended to be about whether to offer one or two payroll elections for elective deferrals (one for “regular” deferrals and one for catch-up contributions) and whether or not to adopt a “deemed” election approach whereby an Affected Participant is deemed to have elected Roth with respect to catch-up contributions when the time comes. Although the deemed election approach requires notice to participants so that they can make a different election, the final regulations generally put a thumb on the scale by providing that unless the deemed election approach has been selected the only method to cure a Roth as catch-up failure is by making distributions.
Finally, regulations permit plans to choose to take any elected Roth contributions made by an Affected Participant during the year into account as catch-up contributions, even if those dollars were not otherwise thought to be catch-up contributions when made.
Example: Sally, an Affected Participant, contributes 10% as traditional (pre-tax) and 10% as Roth (after-tax) elective deferrals and upon reaching the 2026 $24,500 limit, has $12,250 in traditional (pre-tax) and $12,250 in Roth (after-tax) 401(k) contributions. Sally’s elective deferral contributions continue as catch-up contributions. But because she has already contributed $8,000 of elective deferrals as Roth, all deferrals in excess of $24,500 can continue to be split between traditional and Roth, or she could make all catch-up contributions as traditional or all as Roth, as she elects.
Partners and Sole Proprietors. Unless (until?) Congress amends the law, self-employed persons (such as partners in partnerships) who are subject to SECA tax are generally not subject to this new requirement. That said, there are a few wrinkles. First, if an employee becomes a partner, the employee’s FICA wages in the prior year will be taken into account in determining whether the individual is an Affected Participant for the year. The final regulations also provide that in the case of a plan without a Roth contribution feature, a consequence of which is that Affected Participants cannot make catch-up contributions, nondiscrimination requirements can be satisfied only if all participants who are highly compensated employees (HCEs), including for this purpose any self-employed individuals, are prevented from making catch-up contributions.
Controlled group complications. Based on our experience so far, the real complexity of the Roth as catch-up requirement comes into play with employers that are part of a controlled group with multiple plans. Issues range from the simple (whether or not to aggregate compensation across multiple affiliates) to the complex (consistency in approaches as required).
In return for avoiding nondiscrimination testing, catch-up contributions are subject to a “universal availability” rule. That means that all plans within a controlled group must offer catch-up contributions or none can. (This same rule applies with respect to super catch-up contributions – the enhanced contribution limit for those ages 60, 61, 62 and 63.)
With respect to the Roth as catch-up requirement, regulations provide that in identifying Affected Participants, FICA wages of each common law employer are taken into account without aggregating across a controlled group. Thus, for example, if an employee receives FICA wages from both a parent and a subsidiary organization, FICA wages are not aggregated for purposes of determining whether the employee is an Affected Participant. Employers may, however, choose to aggregate, although if it happens, this must be documented in the plan document.
Finally, where there are multiple plans in a controlled group, we believe that each plan can decide whether or not to adopt the deemed election approach as well as whether or not to treat earlier Roth contributions as Roth catch-up contributions.
Focusing on corrections. Given all of the changes necessary to implement this new requirement, it is virtually inevitable that there will be errors. As noted, the regulations provide for three correction approaches (distribute, the W-2 method and the in-plan Roth conversion method). Whether these are the exclusive remedies is not clear. EPCRS, including the expansion of correction principles sanctioned by Congress as part of SECURE 2.0 Act, may remain available for plans that do not satisfy the requirements of the regulations.
Documenting Good Faith Compliance: Recognizing that most plan sponsors and plan administrators will have by now made changes to their payroll and recordkeeping feeds, respectively, we suggest that the data be subject to an initial audit in March/April (that is, once W-2s are out and the 2025 year-end testing is done). It will certainly be easier to catch and correct problems early in 2026 instead of waiting until 2027.
Dealing With Retirement Plan Operational Problems
This may be a good time to conduct an audit not just on whether the new Roth as catch-up programming has been implemented correctly but as to whether other plan provisions are being properly administered. For example, among the most common problems identified by the Internal Revenue Service (and us) is the failure to properly apply a retirement plan’s definition of compensation. Part of the problem is that there may be multiple definitions of compensation used for different purposes and payroll changes may not have necessarily kept up with feeds to the recordkeeper. Common issues include the addition of new non-cash payroll codes (required to be treated as compensation for plan purposes if the plan is using a Box 1 of Form W-2 (with addbacks) definition, for example) and whether elective deferrals shut off once a participant has reached the annual compensation limit for the year – $360,000 for 2026. In the latter situation, the Internal Revenue Service position is that if the plan document allows, elective deferrals may be made on compensation in excess of the annual compensation limit, as long as all required testing is ultimately satisfied. Other issues include proper implementation of automatic enrollments and automatic increases, generally as well as the new mandatory automatic enrollment requirement, matching contribution calculation nuances and the many new (and often cumbersome) requirements around long-term part-time employees.
Coming Soon . . . Retirement Plan Amendments
The time has come to amend tax-qualified retirement plans (including 403(b) arrangements) for various changes in the law including the original SECURE Act, the SECURE 2.0 Act, the CARES Act and the Taxpayer Certainty and Disaster Tax Relief Act of 2020. Pre-approved plans are on a slightly different cycle but for individually designed plans, documents will need to be amended by the last day of the plan year beginning on or after January 1, 2026 (December 31, 2026 for calendar year plans). At the moment, there is no indication that this deadline will be postponed (although the Internal Revenue Service just postponed the deadline for updating IRA documents), nor has any information yet been published as to whether or not individually designed plans may be filed with the Internal Revenue Service for an updated determination letter. Note, by the way, that Section 403(b) plans using a pre-approved plan will need to update their documents by December 31, 2026.
Given the sheer number of changes in the law and the delayed effective dates of many, we have been urging plan sponsors and plan administrators to keep careful track of implementation dates. The Internal Revenue Service will require accurate effective dates for plan changes as part of required plan amendments. If you are behind on this task (did you increase the small balance cash-out limit to $7,000 and if so, as of what date? when did you first offer “super” catch-up contributions?), now is a good time to review your plan records and work with your recordkeepers to nail down effective dates of provisions.
One final note. The Internal Revenue Service just published updated tax notices reflecting various changes in the law since August 2020 to be distributed to participants receiving a distribution (formerly known as the “402(f)” or “Special Tax Notice Regarding Plan Payments”). If you have a stash, be sure to obtain the updated versions. The updated notices – one each for fully taxable and Roth balances – can be used for tax-qualified retirement plans, 403(a) and 403(b) arrangements and 457(b) governmental plans.
HIPAA Notice Of Privacy Practices Updates By February 16th
Group health plans and other covered entities are required to ensure that certain health information created or received by the plan are protected in accordance with the requirements of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). In addition to HIPAA protections that apply to protected health information (“PHI”) broadly, certain substance use disorder (“SUD”) records are subject to additional protections under 42 C.F.R. Part 2 (“Part 2”). The Part 2 protections are generally more rigorous than HIPAA’s protections for other types of PHI.
Under HIPAA, covered entities are required to provide and furnish a Notice of Privacy Practices (“NPP”) describing HIPAA’s use and disclosure protections, individual rights and the covered entity’s legal duties with respect to PHI. The U.S. Department of Health and Human Services issued a final rule requiring that covered entities update their NPPs to address the Part 2 requirements that apply to SUD records, including the requirement for written consent to use or disclose SUD records and the prohibition on the use of SUD records in certain proceedings.
NPPs are required to be updated by February 16, 2026 for these changes. For fully-insured arrangements, the insurer is generally responsible for updating and issuing NPPs. Sponsors of self-insured plans should ensure that their administrative service provider or consultants have prepared and delivered updated forms to covered individuals. If the plan posts its NPP on its website, it may distribute the revised NPP by posting the revised version by the new effective date and providing a hard copy in its next annual mailing. If the plan does not post the NPP on a website, it must provide the revised NPP (or a description of the change and how to obtain a revised NPP) within 60 days.
In addition to updating NPPs, plan sponsors should note that if a business associate to a group health plan will process SUD records, Business Associate Agreements may need to be updated to contractually bind the business associate to comply with Part 2 requirements.
Training Reminders
A variety of training requirements apply in the employment and benefits realm. For example, so-called “covered entities,” which potentially picks up employer sponsored self-insured health arrangements (such as health reimbursement arrangements and health care flexible spending accounts), are required to provide training with respect to protected health information under HIPAA. In addition, other employment and/or benefits training is often encouraged by regulators, or viewed as a best practice, even where not required. In Massachusetts, for example, employers are encouraged to conduct anti-discrimination and sexual harassment training annually. And employees responsible for plans subject to ERISA, such as 401(k) plans, often benefit from periodic fiduciary training and operational compliance reviews.
