Workers age 50 and older who earned more than $150,000 in the prior year can no longer shelter their 401(k) catch-up contributions from income tax upfront. Beginning with the 2026 plan year, those extra contributions must flow into a designated Roth account and be made with after-tax dollars. The rule, rooted in Section 603 of the SECURE 2.0 Act, rewrites a decades-old option that let high earners defer taxes on every dollar they put into a workplace retirement plan.
How the $150,000 Roth catch-up threshold took shape
Congress set the original wage line at $145,000 when it passed a sprawling year-end spending package that included the SECURE 2.0 retirement provisions inside H.R. 2617. Section 603 of that law directed that catch-up contributions by participants earning above $145,000, indexed for inflation, must be designated Roth contributions. The threshold stayed at $145,000 for 2024, the base year used to determine Roth treatment for 2025 catch-up deposits. For the 2026 plan year, the IRS raised the figure to $150,000 through its annual cost-of-living adjustment process. That means any worker whose 2025 W‑2 wages exceed $150,000 will be required to route catch-up dollars into a Roth account starting in January 2026.
The mechanics work on a look-back basis. A plan checks a participant’s prior-year wages from the same employer. If that number tops the indexed threshold, the participant loses access to pre-tax catch-up deferrals for the following calendar year. Workers who earned $150,000 or less keep the choice between pre-tax and Roth catch-up contributions, assuming their plan offers both.
Treasury and IRS regulations that lock in the after-tax requirement
Treasury and the IRS moved to formalize the mandate through proposed regulations published in Internal Revenue Bulletin 2025‑08. Those rules spell out which catch-up eligible participants must use Roth accounts and how plan administrators should apply the wage test. The requirement is also codified in 26 CFR 1.414(v)-2, which establishes the regulatory framework for designated Roth catch-up contributions under section 414(v)(7).
For affected employees, the practical difference is straightforward but significant. A pre-tax catch-up contribution of $7,500 reduces current taxable income by that amount. The same $7,500 deposited as a Roth contribution does not. Take-home pay shrinks in the year the contribution is made, though qualified withdrawals in retirement generally come out tax-free if holding period and age requirements are met. High earners who have been maximizing pre-tax deferrals for years will see a noticeable change on their first paycheck of 2026 if they continue contributing at the same level.
Open questions for plan sponsors and participants heading into 2026
Several operational details remain unsettled as employers prepare for the new rule. The regulations outline the basic wage look-back test, but plan sponsors still have to translate that framework into payroll codes, enrollment forms, and participant communications. For example, sponsors must decide how to handle midyear rehires, employees who transfer between related companies with separate plans, and workers whose compensation fluctuates sharply from year to year.
Another challenge is error correction. If a plan mistakenly accepts pre-tax catch-up contributions from someone whose prior-year wages exceeded the threshold, the regulations contemplate that those amounts should be reclassified as Roth contributions. In practice, though, that reclassification can be complicated if the plan does not already maintain a Roth source for that participant, or if payroll systems have already issued pay stubs and year-to-date tax reporting based on the original pre-tax designation.
Communication timing is also critical. Because the wage test uses prior-year W‑2 pay, employees may not realize they have crossed the threshold until after year-end. Plans will need to notify impacted workers before the first payroll of 2026 so they can adjust their deferral elections. Without clear notice, some high earners could be surprised when their net pay falls due to the shift from pre-tax to Roth catch-up contributions.
Participants themselves face planning questions. Some may welcome the forced diversification into Roth dollars, especially if they expect higher tax rates in retirement or value the flexibility of tax-free withdrawals. Others, particularly those in very high current brackets, may prefer the immediate deduction that pre-tax catch-up contributions once provided. These workers might respond by trimming their total contributions, redirecting savings to health savings accounts, or seeking tax-deferred options outside the employer plan where available.
Plan sponsors are weighing whether to expand Roth features more broadly in response. The after-tax mandate applies only to catch-up contributions, but employers may decide that if they must support Roth payroll and recordkeeping for older, higher-paid workers, they might as well offer Roth deferrals to the broader employee population. That could increase administrative complexity in the short term but give participants more flexibility in structuring their long-term tax exposure.
As the 2026 effective date approaches, employers, recordkeepers, and advisors are watching for additional guidance that could clarify gray areas and streamline compliance. Until then, both sponsors and participants will need to model how the Roth catch-up requirement affects cash flow, tax bills, and retirement readiness-and adjust contribution strategies accordingly.
