Catch-Up Contributions for Higher Earners in 457(b) Plans: What You Need to Know

On September 15, the IRS issued final Treasury regulations implementing provisions of the SECURE 2.0 Act related to age-50 catch-up contributions under employer-sponsored retirement plans.

While many plan administrators were hoping for additional time, the IRS did not extend the nonenforcement period with respect to the Roth catch-up requirement for higher earners, which must still be implemented by 2026.

This means that beginning January 1, 2026, if you participate in a governmental 457(b) plan, are age 50 and older and earned more than $145,000 (indexed annually) in the prior calendar year, you must make age-50 catch-up contributions on a Roth basis.

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The change affects not only you as a plan participant, but also your employer and the plan administrator responsible for tracking wages, managing elections and ensuring proper tax reporting.

For governmental plans, especially those with multiple participating employers or those that may not have offered Roth contributions before, the Roth catch-up requirement introduces new complexity.

Identifying a higher earner

The Roth catch-up requirement applies to participants whose Federal Insurance Contributions Act (FICA) wages exceeded $145,000 (indexed annually) in the prior calendar year.

The Treasury regulations clarified that this threshold is based on Box 3 Social Security wages, not Box 5 Medicare wages. In other words, if you do not participate in Social Security and, therefore, do not receive FICA wages from your employer, then you are exempt from the Roth catch-up requirement.

If you do participate in Social Security, however, the Roth requirement applies to you if your actual FICA wages exceed the $145,000 (indexed annually) threshold for the prior year.

This determination is made separately for each common-law employer, meaning that in a multiple-employer plan, each employer must evaluate the application of the rule to its own employees independently.

If you are an age-50 participant and worked for two different employers in the same year and one employer paid FICA wages that exceeded the threshold while the other did not, only catch-up deferrals made from the wages paid by the employer that exceeded the threshold must be made as Roth. This may impact the employer through which you elect to make your catch-up contributions.

While the default rule requires each employer to assess the threshold independently, the Treasury regulations introduce two circumstances in which an employer can voluntarily aggregate with another employer for purposes of this rule:

• Common paymaster arrangements. If the common-law employer uses a common paymaster, it may be treated as a single employer together with other employers that also use the same common paymaster.
• Controlled group aggregation. Some or all of the employers that are in the same controlled group, as defined under Internal Revenue Code §414(b), (c), (m) or (o), can also be treated as a single employer.

In either case, the plan document must provide for this aggregation. It will be important to understand if the 457(b) plan in which you participate has adopted either of these voluntary aggregation rules.

Deemed Roth elections

To help simplify administration, the Treasury regulations allow a plan to provide that a higher earner within the meaning of this new rule is “deemed” to have irrevocably designated any age-50 catch-up contributions as designated Roth contributions.

In other words, if you, as a higher earner, elected on your salary reduction agreement to make pretax deferrals that exceeded the regular deferral limit ($23,500 for 2025), the plan could provide that any deferrals that exceed the limit — the age-50 catch-up contributions — are “deemed” to have been designated as Roth contributions.

This ensures that your catch-up contributions do not stop during the year, unless you choose to stop them.

Plans that adopt deemed Roth provisions may choose between two approaches for applying the deemed Roth rule:

• Pretax threshold approach. The deemed Roth election applies once a participant’s pretax elective deferrals reach the regular IRS limit. This method considers your prior Roth contributions when determining how much of the age-50 catch-up must be Roth.
• Total deferral threshold approach. The deemed Roth election applies once a participant’s total elective deferrals (including Roth) reach the regular IRS limit. This may be easier to administer because the plan does not have to look at your earlier deferrals to determine how much of the age-50 catch-up must be made as Roth.

Regardless of the method chosen, plans must ensure that participants have an effective opportunity to make a different election. The IRS does not require a specific notice, but participants must be informed through online portals, plan guides or other communications that they can opt out of the deemed Roth treatment.

It will be important for you to understand how your 457(b) plan chooses to address this new rule, which will dictate how proactive you need to be.

The deemed Roth election is not required to apply until after the participant’s elective deferrals exceed the special catch-up limit, if applicable. The special catch-up permits an eligible participant to make deferrals up to twice the regular deferral limit for the three taxable years prior to their normal retirement date. This catch-up can still be made pretax.

New correction methods

Generally, if an age-50 catch-up contribution is made as a pretax contribution when it should have been made as a Roth contribution, the correction is to distribute the age-50 catch-up contribution from the plan to the participant in accordance with the correction method for correcting 457(b) limit failures.

However, so long as the plan provides that age-50 catch-up contributions are “deemed” Roth for higher earners, the Treasury regulations outline two additional available correction methods that allows the contributions to remain in the plan consistent with participant expectations:

Form W-2 correction method. The pretax age 50 catch-up contribution that should have been made as Roth can be transferred (after adjusting for earnings/losses) to the higher earner’s Roth account.

The contribution (not adjusted for earnings/losses) must be included in the participant’s gross income for the year in which it was made to the plan and reported on Form W-2 as if it had been made correctly as a Roth contribution.

This correction method recharacterizes the pretax age 50 catch-up contribution as if it had properly been made as a Roth age 50 catch-up contribution. This method is available only if the correction is made before your Form W-2 for that year has been issued or filed.

In-plan Roth rollover method. Alternatively, a plan can correct a pretax age 50 catch-up contribution that should have been made as Roth by making an in-plan Roth rollover of the elective deferral (adjusted for earnings/losses) from the higher earner’s pretax account to the participant’s designated Roth account.

The in-plan Roth rollover would be reported on Form 1099-R, and the contribution (adjusted for earnings/losses) would be included in the participant’s gross income for the year of the rollover. This correction is available through the end of the calendar year following the year of the error.

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The same correction method must be applied to all similarly situated participants within the plan year. Plans must have reasonable procedures in place to prevent Roth catch-up errors, which include “deeming” age-50 catch-up contributions to be Roth for higher earners.

No correction is required if the error amount is $250 or less, or if the participant was incorrectly classified as a higher earner owing to a W-2 error that was corrected after the correction deadline passed.

Next steps

To prepare for the upcoming changes, plan sponsors and administrators will need to consider taking the following actions:

• Review payroll systems to ensure accurate tracking of FICA wages.
• Determine whether the plan will adopt an optional aggregation rule for FICA wages.
• Consider adopting a deemed Roth catch-up election provision and determine which design approach is best supported by the plan’s administrative processes.
• Review plan materials to ensure the Roth catch-up rules for higher-earner participants (including application of a deemed election) are adequately communicated to them.
• Update correction procedures for noncompliant contributions, including the special correction methods for plans that adopt a deemed Roth catch-up provision.
• Coordinate with recordkeepers and payroll providers to ensure accurate tax reporting and implementation of deemed Roth catch-ups.
• Document plan operation and accurately reflect it in a plan amendment that is adopted before the SECURE 2.0 amendment deadline.

Plan participants, on the other hand, will need to consider taking the following actions:

• Determine whether the new Roth rule will apply to them in 2026 and, if so, whether making their age-50 catch-up contributions as Roth fits within their retirement savings strategy.
• Review plan materials and/or talk to their benefits manager regarding whether an affirmative election to continue deferrals as Roth once the regular limit is met for the year will be required.
• If the plan has adopted deemed Roth provisions, whether their deferrals will be deemed Roth when their pretax deferrals reach the regular limit or their total deferrals reach the regular limit.

Tara Schulstad Sciscoe is a partner at Ice Miller, where she advises employers, plans and trusts on the design and compliance of their employee benefit programs.

Shalina Schaefer is a partner at Ice Miller, where she practices employee benefits with a primary focus on retirement plans of tax-exempt and governmental entities, welfare benefit plans, and church plans.

Lindsay Knowles is of counsel at Ice Miller, where she advises state governments, municipalities and other public entities on a wide range of employee benefits matters.

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