Beginning in 2026, new rules under the SECURE 2.0 Act will change how certain employees can make catch-up contributions to their retirement plans. These updates affect 401(k) and 403(b) plans and are especially important for higher-earning employees approaching retirement age.
Understanding these changes now can help you avoid reporting issues and unexpected tax consequences later.
2026 401(k) Contribution Limits
For tax year 2026 and beyond, the IRS has set the following contribution limits:
● Standard 401(k) contribution limit: $24,500
● Catch-up for age 50 and older: $8,000
● Special catch-up for ages 60 to 63: $11,250
These limits apply to both traditional and Roth 401(k) plans, subject to the new rules described below.
What Is a Catch-Up Contribution
A catch-up contribution allows individuals age 50 or older to contribute more than the standard annual limit to their retirement plan.
In 2026:
● Employees under age 50 may contribute up to $24,500
● Employees age 50 and older may contribute up to $32,500
● Employees ages 60 to 63 may contribute up to $35,750
These additional contributions are designed to help individuals boost their retirement savings as they near retirement.
New Rule Under SECURE 2.0: Roth Requirement for Certain Employees
Starting in 2026, a major change applies to certain higher-income participants.
If you are age 50 or older and considered a Highly Paid Individual, any catch-up contributions you make must be treated as Roth contributions, not traditional pre-tax contributions.
This change was enacted as part of federal budget legislation and is intended to generate additional tax revenue.
Who Is Considered a Highly Paid Individual
An employee is considered a Highly Paid Individual if their FICA wages, reported in Box 3 of Form W-2, exceed $150,000. This determination is based on wages from the prior year.
For 2026, this means your 2025 W-2 Box 3 wages must be over $150,000.
Important exceptions include:
● Partners and sole proprietors who do not receive a W-2
● New hires in 2026 without prior-year wages
These individuals are not affected by this rule.
What Employers and Plan Administrators Should Do
To comply with the new rules, employers should take the following steps.
Identify Highly Paid Individuals by running a 2025 payroll report and reviewing employees with Box 3 wages over $150,000.
Update payroll systems so that any contributions exceeding $24,500 are automatically classified as Roth contributions.
Notify affected employees by providing written notice explaining the change and how it affects their retirement contributions.
Update election forms so employees who do not wish to make Roth catch-up contributions may opt out of catch-up contributions entirely.
What If There Is an Error
If an error is identified before 2026 W-2 forms are issued, the catch-up amount can be converted to Roth within the plan and correctly reported.
If an error is identified after W-2 forms are issued, the amount can still be converted to Roth, but a Form 1099-R must be issued.
Addressing errors promptly can help reduce compliance and reporting issues.
Why This Matters
These changes add another layer of complexity to retirement plan administration. For affected employees, catch-up contributions will now be taxed differently. For employers, payroll and reporting systems must be updated to remain compliant.
Failure to follow these rules could result in incorrect reporting, tax issues, and additional administrative work.
Final Thoughts
As 2026 approaches, it is important to identify Highly Paid Individuals early, update payroll and retirement plan systems, communicate clearly with affected employees, and review contribution elections and reporting procedures.
Taking these steps now can help prevent costly problems later.
If you have questions about how these changes affect your business or your retirement planning, please contact Nelson & Associates LLC. Our team is here to help you navigate these updates with confidence.
