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Newly effective laws often require new choices, and one of the choices now required for sponsors of DC plans is particularly interesting. Section 603 of the SECURE 2.0 Act, often referred to as the “Roth catch-up mandate,” requires that employees with FICA wages in the prior year exceeding the Roth catch-up wage threshold under 414(v)(7) (originally $145,000, adjusted annually for cost-of-living increases) can only make catch-up contributions designated as Roth contributions rather than pre-tax contributions. This change goes into effect on January 1, 2026, which is why many plan sponsors are now evaluating how this provision will function.
Plan participants that make over the Roth catch-up wage threshold typically send a significant portion of their income to Uncle Sam each year, which tends to create a desire to maximize pre-tax contributions. We’re not certain how participants covered by this mandate will react, but we expect that many will seek 100% pre-tax contributions below the 402(g) limit and then use post-tax Roth contributions only to the extent that they are financially capable of funding catch-up contributions.
Designating contributions: Two approaches affecting two vendors
When considering catch-up contributions, two approaches are commonly used today: separate election and a single election approach. Each method has pros and cons, and importantly, the Roth catch-up mandate is causing employers to re-evaluate those pros and cons. Since payroll and recordkeeping services are generally provided by separate firms, the sponsor of a plan must often navigate between the preferences and service offerings of two vendors with differing objectives. This is not an ideal position for a plan sponsor to be in, and our intention is to provide sponsors with the information needed to select an approach that is both operationally efficient and serves the participants’ interest.
Separate election approach
In the separate election approach, a catch-up-eligible participant elects their regular contribution amount or percentage and a separate catch-up contribution amount or percentage, and they can update either of these elections throughout the year. While this may appear straightforward, it can present challenges under the Roth catch-up rules.
Participants subject to the mandate may begin making Roth-designated catch-up contributions early in the year — well before exceeding the 402(g) limit. If financial circumstances change, which is common, and a participant doesn’t end up exceeding the limit, those earlier Roth catch-up contributions will remain Roth and taxable. This can result in an unexpected and often unwelcome tax burden.
From a payroll provider’s perspective, this model has historically required less complexity to implement. However, the new rules introduce added responsibility. Payroll must identify which participants exceeded the wage threshold in the prior year and communicate that information in a timely manner to the recordkeeper. In turn, the recordkeeper must restrict these participants from making pre-tax catch-up contributions and notify them accordingly.
The timing challenge is real — many plans won’t be able to capture all affected participants before the first payroll of the new year. If a pre-tax catch-up contribution is made before the restriction is applied, payroll will need to reclassify that contribution to the regular “bucket” (under the 402(g) limit). If the plan doesn’t match on catch-up contributions, this reclassification may also trigger a match correction.
Complications can escalate. When participants discover that Roth contributions have increased their tax liability, they may request — if not demand — recharacterization of those amounts as pre-tax. If a sponsor agrees to this, it requires coordinated, labor-intensive adjustments by both the recordkeeper and the payroll provider. These corrections become more complex if processed after year-end tax reporting. Alternatively, sponsors can refuse such requests, as no error occurred — though this will almost certainly create participant dissatisfaction. These potential pitfalls are why many plan sponsors are considering an alternative.
Single election approach
The single election approach allows participants to make one combined election for their total contribution amount, encompassing both regular and catch-up contributions. While this approach is generally seen as more favorable for participants, it can be more complicated for vendors. There are variations within the single election framework, as some plans will automatically “spill over” from pre-tax regular contributions to Roth catch-up once the 402(g) limit is reached, and others will require the participant to affirmatively elect this spillover.
Regardless of the design, the roles for payroll and recordkeeper remain similar to the separate election approach: Payroll identifies participants exceeding the wage threshold and notifies the recordkeeper, who disables pre-tax catch-up contributions and communicates with affected participants. However, this model also requires programming logic to manage the automatic or elective spillover when a participant hits the 402(g) limit.
Defined Contribution
Make a comfortable retirement a reality for all
The key benefit of the single election approach is that it eliminates the core problem of the separate election approach. A participant subject to the mandate, and seeking to minimize taxable income, won’t inadvertently make Roth contributions before reaching the 402(g) limit. Their pre-tax contributions will be tracked properly, and only after the pre-tax contribution limit is reached will Roth contributions be made.
Bottom line
While the separate election approach may still work for some, sponsors should be fully aware of its operational risks and participant implications. We believe the single election approach is a more robust solution, especially in the context of the Roth catch-up mandate. However, some payroll providers have voiced concerns about its complexity.
We encourage plan sponsors to begin discussions with their payroll providers now, so they can make informed decisions that align with their operational capabilities and participant needs.
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Navigating the Roth Catch-Up Mandate: Are you prepared?
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