New 401k Catch-Up Rules Hit High Earners Starting 2026

Starting January 1, 2026, your highest-paid employees aged 50 and older will lose a key tax break on their 401(k) catch-up contributions. Under new IRS rules implementing the SECURE 2.0 Act, workers earning over $150,000 in the prior year must make all catch-up contributions on a Roth (after-tax) basis, eliminating the pre-tax option they've relied on for years.

What's Changing for Your 401(k) Plan

The changes affect multiple contribution limits and requirements:

• Standard 401(k) limit rises to $24,500 for 2026 (up from current levels)
• Catch-up contributions remain $8,000 for employees 50 and older
• "Super catch-up" allows $11,250 for employees ages 60-63 (up from the standard $8,000)
• High earners lose pre-tax option on all catch-up amounts if they earned over $150,000 in FICA wages the prior year

According to the IRS, this income threshold will be adjusted annually for inflation, but the $150,000 starting point affects roughly 20% of current catch-up contributors.

Bottom Line Impact on Your Business

Plan Administration Costs: You'll need to track each employee's prior-year FICA wages and automatically designate catch-up contributions as Roth for high earners. This requires system updates and likely increased fees from your third-party administrator.

Employee Relations Risk: High-earning employees may reduce or stop catch-up contributions entirely when they lose the immediate tax deduction. A $8,000 catch-up contribution that previously saved them $2,400 in taxes (at 30% rate) now provides no upfront tax benefit.

Compliance Liability: Plan amendments must be completed by December 31, 2026. Failing to properly implement the Roth catch-up requirement could result in IRS penalties and plan disqualification risks.

Competitive Advantage: The super catch-up provision allowing $11,250 for employees ages 60-63 could help you retain experienced workers, but only if your 401(k) plan is properly structured to offer it.

What Long Island Employers Must Do Now

Immediate Actions:

• Review your current participant demographics to identify how many employees will be affected
• Contact your plan administrator to understand system capability and cost implications
• Budget for plan amendment costs and potential ongoing administrative increases

Employee Communication Strategy:

• Educate affected employees about Roth benefits (tax-free growth and withdrawals in retirement)
• Provide modeling tools showing long-term Roth advantages despite losing immediate tax savings
• Consider enhancing financial wellness programs to help employees understand the trade-offs

For many Nassau and Suffolk County professional firms with senior partners and high-earning staff, this change will require careful planning. Medical practices, law firms, and accounting offices typically have the employee demographics most affected by these rules.

Planning for 2026 Implementation

The IRS has indicated that "good faith compliance" will be acceptable for 2026, with full regulatory requirements taking effect in 2027. However, this doesn't reduce your obligation to make reasonable efforts to comply from day one.

Small employers often assume these rules don't apply because they have fewer high earners. That's a costly mistake. Even one employee earning over $150,000 triggers the requirement, and the universal availability rule means super catch-up contributions must be offered to all eligible employees if offered to any.

The shift from tax deferral to tax-free growth represents a fundamental change in retirement planning strategy. While Roth contributions provide no immediate tax relief, they offer tax-free withdrawals in retirement – potentially valuable for high earners who expect to maintain substantial income throughout their careers.

Rather than navigating these complex new requirements alone, Benton Oakfield works directly with your plan administrator to ensure proper implementation of catch-up contribution rules, handles the required plan amendments, and provides employee education materials that explain the new Roth requirements in plain English. Our comprehensive approach protects you from compliance penalties while helping your employees understand how these changes affect their retirement planning.

Compliance Note: Benefit plan rules and tax implications vary based on company size and location. This summary is for informational purposes only. Please contact your Benton Oakfield representative to review how these changes impact your specific plan documents.