Mandatory Roth Catch-Up Contributions: What Plan Sponsors Learned in Year One and What Must Change Before 2027

Article Key Takeaways

• Beginning in 2026, employees age 50+ earning more than $150,000 in prior-year FICA wages must make catch-up contributions on a Roth basis.

• Plan sponsors generally adopted one of two approaches: requiring participants to actively elect Roth catch-up contributions or automatically converting eligible catch-up contributions to Roth.

• Both approaches created unintended consequences: affirmative elections led some participants to miss catch-up opportunities, while automatic Roth treatment caused unexpected changes to take-home pay.

• Participants using split pre-tax/Roth elections experienced a frequently overlooked tax consequence: many ended up with a different overall tax allocation than intended.

• Most operational errors originated in payroll and HRIS data processes, not plan documents.

• The SECURE 2.0 good-faith implementation period ends in 2026, making 2027 a critical compliance and participant communication year.

• Plan committees should review payroll integrations, participant communications, Roth election design, and amendment deadlines before January 2027.

Full Article

Most participants did what the rule required. Many ended up with a tax outcome they didn't choose.

Every major SECURE 2.0 provision follows a familiar pattern. The statute passes, the industry debates the mechanics, final regulations arrive late, and plan sponsors implement on a deadline. Then, about a year later, we learn what the rule actually does to real people.

For mandatory Roth catch-up, that year is almost over.

2026 has been the “practice” year. The final regulations don't take effect until 2027, so sponsors and providers have operated under a reasonable, good-faith standard. That leeway ends in about three months. Before it does, it's worth looking at what clients faced: which approaches worked, where they broke down, and one outcome that caught many participants off guard.

The rule, briefly

Beginning in 2026, participants aged 50 and older whose prior-year FICA wages from the plan sponsor exceeded $150,000 and who wish to use the catch-up contribution feature must make those contributions as Roth contributions. The rule applies to 401(k), 403(b), and governmental 457(b) plans. If a plan doesn't offer Roth, those participants can't make catch-up contributions at all.

The statute is simple. The operational questions it raised were not.

Two models, two different risks

Sponsors generally chose one of two approaches for handling catch-ups by higher earners.

Model A: a separate, affirmative election. The participant has to actively elect Roth catch-ups. With no election, deferrals stop when the participant reaches the regular limit.

Example: Jane Doe makes is 55 and makes $200,000 per year. She wants to maximize her retirement savings in 2026 so she signs up to defer 15% on a pre-tax basis. Her contributions will stop once she reaches the normal employee contribution limit of $24,500 when she makes approximately $163,333.33 in compensation during the year. In order to take advantage of the $8,000 catch-up contribution available to her, she would need to separately elect to defer 4% of her salary on a Roth catch-up basis.

The appeal is clear. The participant makes the tax decision, there are no surprises in anyone's paycheck, and the sponsor has a clean record of consent.

The cost is less obvious. Participants who never read the notice simply stopped contributing when they hit the limit, often in the fall and often without realizing it. In plans that match each payroll without a year-end true-up, some of those participants also lost employer contributions for the rest of the year.

Model B: default Roth treatment. The plan automatically treats catch-ups by higher earners as Roth, and the participant can elect otherwise.

Example: Using the same scenario discussed above, Jane Doe (age 55, earning $200,000) elects to defer 15% of her salary. When she reaches the $24,500 limit, the employer automatically switches her deferrals to Roth catch-up contributions, so an additional $5,500 would be deferred into the plan on a Roth basis. In order to maximize contributions, she would need to elect to defer 16.25% of pay.

This model keeps people saving. Contributions continue without interruption, and no one has to do anything to keep their savings rate. That's a meaningful advantage, and it's why many clients chose it.

The cost is that participants didn't choose the outcome, and some didn't notice it until their take-home pay dropped. In our previous example, Jane’s take-home pay would drop when she reaches the $24,500 limit, and the employer switched her deferrals to after-tax.

Model A risks lost savings. Model B risks lost understanding. Neither is wrong, but each needs a different communication plan.

The split-election surprise

Many higher-earning participants use a split election: some percentage pre-tax and some Roth, often 50/50. It's a sensible way to diversify tax exposure.

Here's what happened to those participants in 2026. The regular deferral limit, $24,500 this year, counts pre-tax and Roth contributions together. Every dollar above that limit is a catch-up contribution and, for a higher earner, must be Roth. A participant with a 50/50 election reached the limit, having used only half of their pre-tax capacity. From that point on, everything went to Roth.

Consider a 55-year-old earning $200,000 who contributes the full $32,500 ($24,500 regular plus $8,000 catch-up) with a 50/50 election:

This participant gave up $4,000 of pre-tax deferral they were entitled (and intended) to use. At a combined federal and state marginal rate in the low 30s, that's roughly $1,300 in additional current-year tax, plus a long-term tax mix that no longer reflects what they intended.

The law required the catch-up to be Roth. It did not require the participant's overall mix to shift. That came from election design.

This showed up in both models, but it was most common under the default Roth treatment, where participants had no reason to revisit their election. Participants may be able to model the right base election if they want to keep a target mix. Very few do so.

What else we learned

This is a payroll and HRIS problem, not a plan problem. The test runs on W-2 Box 3 wages from the employer sponsoring the plan. Nearly every error we saw started with the data handoff between payroll and the recordkeeper, not with the plan document. Some tax-exempt organizations make this harder: affiliated entities, health systems and foundations sharing a common paymaster, mid-year hires with no prior-year wages from the sponsor, and rehires.

Timing determines the correction. The final regulations provide correction methods for catch-ups that should have been Roth but weren't. Which method is available depends on when the error is caught, and catching it before W-2s go out is much easier than after.

Someone has to own the handoff. When payroll, the recordkeeper, and sometimes a TPA each handle part of the process, accountability gets lost.

What changes in 2027

The good-faith standard ends, and the final regulations apply, though governmental and collectively bargained plans have later applicability dates. Most plans need their amendments adopted by Dec. 31, 2026. Collectively bargained plans have until 2028, and governmental plans until 2029. The $150,000 threshold is indexed, so the list of affected participants needs to be rebuilt from 2026 wages.

A year-end checklist for committees

• Validate what your payroll and HRIS systems will accommodate in 2027
• Validate what your recordkeeper can accommodate in 2027
• Decide whether your current model, affirmative election, or default Roth is the right one for your workforce.
• Identify participants with split elections who contributed catch-ups in 2026, and reach out to them before the first 2027 payroll.
• Confirm the payroll-to-recordkeeper data feed for 2026 wages, including affiliated entities.
• Review any 2026 errors and how they were corrected.
• Confirm the status and timing of your plan amendment.
• Send participants a plain-language notice about what happens in January and what they can change.

A closing thought

Roth catch-up is not a complicated rule. What made year one difficult was the distance between what the rule requires and what participants understood was happening to their money.

Multnomah Group is a registered investment adviser registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.