Section 603 of the SECURE Act 2.0 introduced a new provision, modifying who is eligible to make pre-tax catch-up contributions. The sole purpose of this provision is to generate revenue to cover the anticipated costs of tax credits that encourage small employers to adopt 401(k) plans. The final regulations were issued on September 16, 2025.
Along with this new provision came a new term, Highly Paid Individual (HPI), which has become the industry vernacular. An HPI is defined as an individual with social security wages exceeding $150,000 in 2025. Starting January 1, 2026, these individuals will be subject to new catch-up rules that reclassify all their pre-tax deferrals that are in excess of $24,500 as Roth contributions for plan years they are an HPI. The wage threshold is indexed to inflation and is expected to increase in subsequent years.
The same rules apply to catch-up contributions that result from the reclassification of pre-tax contributions in a failed ADP test. For the excess contributions to be classified as catch-up, they must be reclassified as Roth catch-up for HPI.
It’s important to note that the wage threshold of $150,000 in the 2026 look-back year (2025) is FICA wages as defined by IRC §3121(a). This amount is reported in Box 3 of IRS Form W-2. Self-employed individuals, such as partners or sole proprietors, earn income rather than FICA wages, so they are not subject to the Roth catch-up requirement. Therefore, anyone with wages exceeding the $150,000 threshold is subject to the new Roth catch-up rule.
Aggregation among related employers is not required. The regulations explicitly state that only wages from the employer sponsoring the plan are subject to the Roth catch-up provision. For instance, if an employee has wages of $100,000 from the sponsoring employer and $55,000 from a related employer who is also an adopting employer, the employee is not considered an HPI because their wages from the sponsoring employer were less than the $150,000 threshold.
For plans that don’t allow designated Roth contributions, reclassification won’t be permitted, and the catch-up contributions will be refunded to the participant.
Employers have three operational options, with one being the default if no action is taken.
First, they can encourage employees who will be HPIs to change their deferral election so that the catch-up portion is designated as a Roth election. This proactive approach can help mitigate the additional income taxes due in the following year when the reclassification is taxed.
Second, employers can coordinate with their payroll provider to automatically classify catch-up contributions as Roth. While different payroll providers may have unique system configurations, it’s crucial for employers to document their procedures so that plan auditors can connect the dots when an employee doesn’t make a Roth election, and a portion is automatically reclassified as Roth. Proper documentation is essential as everyone navigates these new rules, as the prescribed audit standards are published by the AICPA.
Lastly, if employers take no preemptive action, the plan’s third-party administrator (TPA) will make the necessary calculations and reclassifications at year-end and issue the required tax notices. However, since most TPAs are not record keepers, it’s imperative that the recordkeeper properly reclassifies the catch-up contributions. Otherwise, the participant will end up with double taxation on the misclassified catch-up.