The U.S. tax system has a highly complex structure of retirement plans. One of these includes the Roth retirement account, where contributions to the account are made out of after-tax income.
Beginning January 1, 2026, significant changes came into effect for certain U.S. employees, affecting how they make, and whether they can make, catch‑up contributions to their employer‑sponsored U.S. retirement plans.
These rules have been evolving over the last three years, since their introduction under the 2022 SECURE 2.0 Act.
The rules were originally set to be become effective for tax years beginning in 2024. That was until the IRS extended the date of effect to tax years beginning in 2026, to allow more time for a smooth transition. Notably affected are retirement plan sponsors, some of whom may not have offered a Roth contribution plan to their employees before these changes. Payroll systems and financial institutions are also faced with the requirement to change their systems. This has forced a large shift in how such retirement plans are now being administered with the U.S.
Plan sponsors have, however, been allowed to adopt the new rules on a voluntary basis, for tax years commencing during 2024.
These updates will reshape tax planning for millions of Americans—particularly higher‑income earners—and employers will need to ensure their payroll and plan systems are adjusted accordingly.
The final regulations to the new mandatory Roth catch-up contribution rule were issued by the Treasury Department in September 2025. They are effective for tax years beginning in 2027.
Whilst there is a two-year administrative transition period, for tax years beginning in 2024 and 2025, the final regulations don’t have any impact on those years.
These final regulations generally followed the proposed regulations, with some additions. What is required to correct non-compliance with the Roth catch-up requirement, the implementation of a deemed Roth Election, and rules for individuals located in Puerto Rico are some of those additions.
The New Mandatory Roth Catch‑Up Rule
For tax years beginning in 2026, any taxpayer age 50 or older who earned more than $150,000 in FICA wages during the prior year must make all catch‑up contributions on a Roth (after‑tax) basis.
This means:
- The traditional pre‑tax catch‑up option will no longer be available to these individuals. Prior to SECURE 2, individuals could make catch up contributions to their plan[1] on either a pre-tax, or an after-tax basis.
- Taxes are paid up front on catch‑up contributions.
- Withdrawals in retirement will be tax‑free provided the Roth withdrawal rules applicable at the time of withdrawal are satisfied.
What if the plan does not offer a Roth 401(k)?
If an employer does not offer a Roth option in its 401(k), affected employees will not be able to make any catch‑up contributions at all, even though they are eligible by age.
This is a major compliance concern for many plans that have historically offered only traditional 401(k) contributions.
Who Exactly Is Affected?
The rule applies to:
- Employees age 50 or older, and
- Whose prior‑year wages exceed $150,000, measured using W‑2 Box 3 (Social Security wages).
The $150,000 threshold is indexed annually for inflation.
What if the employee works for more than one employer, but the total FICA W-2 wages from each employer is less than the $150k threshold?
Total wages are not aggregated, for the purpose of calculating whether an employee is over the annual threshold ($150,000 for 2025). Thus, an employee may have less than $150,000 wages on one W-2 in box 3, from one employer, and less than $150,000 on another W-2, in box 3, from another employer, and not be subject to the mandatory catch-up rules.
What if the individual is self-employed?
The mandatory catch-up rules don’t apply to self-employed individuals – only to employees.
Contribution Limits in 2026
For 2026, the standard catch‑up limit for age‑50+ participants is:
- $8,000 for 401(k), 403(b), and most employer plans.
In addition:
- Workers aged 60–63 may be eligible for a “super” catch‑up contribution of $11,250.
These limits apply whether the catch‑up is Roth or (where permitted) traditional.
Why the Change?
The Roth‑only mandate is part of Congress’s effort to increase tax revenues up front while still encouraging long‑term retirement savings. Because Roth contributions are made with after‑tax dollars, the government collects taxes earlier than it would under a tax‑deferred model.
Impact on Employee Tax Planning
The rule may meaningfully change tax strategy for many savers:
- Higher‑income earners lose the immediate tax deduction previously available through traditional catch‑up contributions.
- Some individuals may see higher taxable income and higher tax bills in the year contributions are made.
- Others may benefit from tax‑free withdrawals later on, especially if they anticipate being in a higher tax bracket in retirement.
Impact on Employers and Plan Sponsors
Employers must:
- Ensure their payroll systems identify employees over age 50 and with prior‑year wages exceeding $150,000.
- Implement Roth contribution functionality if currently missing.
- Update plan documents and communication materials accordingly.
A failure to offer a Roth option will automatically disqualify certain employees from making catch‑up contributions at all.
Key Takeaways
- Starting January 1, 2026, catch‑up contributions for higher‑earning employees age 50+ must be made as Roth contributions only.
- If the plan sponsor does not provide a Roth option, then there is no catch‑up contribution available for those employees such to the new catch-up rules.
- Standard catch‑up limit increases to $8,000, and “super catch‑up” for ages 60–63 remains $11,250.
- Employers must update systems and plan designs to remain compliant.
- Individuals should review tax implications and consider whether Roth contributions align with their retirement strategy.
- There is even more reason for individuals who plan to relocate out of the U.S., to pay attention to this new mandatory catch-up requirement. This is due to the fact that if they are required to make a 2026 catch-up contribution, regardless of their location, having departed, or planning to depart the U.S. will not eliminate this requirement. Furthermore, the employee may not be able to make a catch-up contribution after departure, if they come off U.S. payroll. Planning can assist with minimizing tax in light of these new rules, including and especially in the new country of residence.
[1] Plans including 401(k), 403(b) and governmental 457(b) plans
Disclaimer:
This article is current at the time of publication and does not constitute tax advice. Specific advice should be sought in relation to the topics discussed in this article. NZ US Tax Specialists Limited accepts no responsibility whatsoever for any loss resulting from reliance on the contents of this article.
