How to Guide Clients on the 2026 Roth Catch-Up Requirement

Beginning January 1, 2026, employees aged 50 or older who earned more than $150,000 in the prior calendar year (as reported in Box 3 of their W-2) must make their catch-up or super catch-up contributions as Roth (after-tax) contributions.

Who This Applies To

This rule applies to employer-sponsored 401(k) plans that:

• Offer catch-up contributions, and
• Issue W-2 wages to employees.

It affects employees who meet all of the following criteria:

• Are age 50 or older,
• Earned more than $150,000 in Box 3 wages on their W-2 from the previous year (indexed annually), and
• Contribute more than the annual 402(g) deferral limit ($24,500 for 2026, indexed for future years).

These employees are referred to as Highly Paid Individuals (HPIs) or Highly Paid Participants (HPPs).

Ubiquity uses the term Highly Paid Individual (HPI) to align with our plan document provider.

Self-Employed Individuals and the Roth Catch-Up Rule

Self-employed individuals who report their compensation on Schedule C (sole proprietors) or on a Schedule K-1 (partners in a partnership) are not considered Highly Paid Individuals (HPIs) for purposes of the 2026 Roth catch-up contribution rule.

Because these individuals do not receive W-2 wages subject to Social Security tax, they do not have Box 3 compensation on a W-2, the measure used to determine HPI status.

As a result:

• Even if a self-employed business owner earns more than $150,000, they are not classified as an HPI, and the Roth catch-up requirement does not apply to them.
• It is common for a plan to include employees who are HPIs while the owner is not, if the owner reports income on a Schedule C or K-1 rather than receiving W-2 wages.

While the Roth catch-up rule does not apply to these self-employed individuals, Ubiquity encourages all clients to consider adding a Roth contribution feature to their plan if it does not already exist.

• Adding a Roth option gives employees flexibility and ensures that HPIs, if any, can continue making catch-up contributions without interruption.
• However, plans that do not currently allow Roth contributions are not considered out of compliance under IRS guidance.
• The final IRS regulations clarified that a plan will not lose qualified status or fail to meet the benefits, rights, and features requirement simply because it does not permit Roth deferrals.

It’s important to note, though, that if a plan includes HPIs and does not allow Roth contributions, those employees cannot contribute above the 402(g) limit, since any catch-up contributions must be Roth beginning in 2026.

Advisors may want to discuss this consideration with their self-employed clients to ensure plan design decisions align with participant demographics and contribution goals.

How Ubiquity Is Handling Roth Catch-Up Contributions

Ubiquity is working to ensure that all systems and processes are aligned with the 2026 Roth catch-up requirements.

• Client and Payroll Coordination:
  Plan sponsors will need to work with their payroll provider to identify employees who qualify as HPIs and confirm that payroll systems can properly designate and transmit Roth catch-up contributions for those individuals.

• Ubiquity Support for Plan Sponsors:
  Ubiquity will assist plan sponsors with processing any Roth recharacterizations that result from:

  • ADP/ACP testing adjustments, where employee deferrals are recharacterized as catch-up contributions, or
  • Misidentification of HPI employees or failure to submit catch-up contributions as Roth, requiring correction.

• Roth Plan Design:
  Ubiquity will add a Roth contribution source to any record-kept plan, free of charge. 

Advisors’ Role: Helping Clients Identify and Communicate With HPIs

Advisors play a key role in helping plan sponsors comply with the new Roth catch-up rule by ensuring they understand who in their plan qualifies as an HPI and how to communicate that status to employees.

1. To confirm who qualifies as an HPI your clients should:
   • Review each employee’s prior-year W-2, Box 3 compensation.
   • If an employee is age 50 or older and earned more than $150,000, they are considered an HPI.
2. Encourage client communication:
   • Advise sponsors to notify affected employees that they are HPIs and that any catch-up contributions beginning in 2026 must be Roth.
   • Direct employees to our Help Center article Understanding the 2026 Roth Catch-Up Contribution Rule for details and examples.

Helping Sponsors Monitor Contributions Beyond the 402(g) Limit

Once an employee reaches the 402(g) contribution limit ($24,500 for 2025, indexed for future years), any additional contributions are automatically treated as catch-up contributions.

For HPIs, those catch-up contributions must be Roth unless the employee has already contributed an equivalent Roth amount earlier in the year.

Examples:

The IRS rule does not require Roth contributions to be labeled as “catch-up.”
It only requires that an amount equal to the contributions made above the 402(g) limit be Roth contributions.

When a Roth Recharacterization Might Be Required

A Roth recharacterization occurs when contributions that were originally made as pre-tax must be converted to Roth to comply with the SECURE Act 2.0 Roth catch-up requirement.

There are two primary situations when this may occur:

1. Tested Plans: When an Employee Is Both an HPI and an HCE

If a plan is subject to ADP/ACP testing and an employee is both a Highly Paid Individual (HPI) and a Highly Compensated Employee (HCE), the following can occur:

• During testing, some of the employee’s regular pre-tax deferrals may be recharacterized as catch-up contributions to help the plan pass nondiscrimination testing.
• If those recharacterized catch-up contributions were made pre-tax, and the employee has not made enough Roth contributions to cover that amount, or all of their contributions were pre-tax, those recharacterized contributions must be converted to Roth in the recordkeeping system.
• Any required Roth recharacterizations resulting from testing or identification errors will occur during the 2026 testing season, typically in early 2027.

Ubiquity will identify when this occurs based on testing data and will work directly with the plan sponsor to process the Roth conversion and notify affected participants. 

2. Misidentification of HPIs or Payroll Errors

If a plan sponsor or payroll provider fails to identify HPIs correctly and allows them to make pre-tax contributions above the 402(g) limit, those excess pre-tax contributions are also subject to Roth recharacterization.

If this error is discovered:

• Before the end of the plan year and before W-2s are issued:
  • The issue can be corrected through payroll adjustments and issuing an updated Form W-2 to the employee reflecting Roth contributions.
• After W-2s have been issued:
  • The plan sponsor will need to request an in-plan Roth recharacterization for the affected funds.
  • This correction method is only permitted for catch-up contributions that must be Roth under the SECURE Act 2.0.
  • In-plan Roth conversions are not allowed for any other reason as part of this correction process.

Advisors should make sure clients understand that identifying HPIs accurately at the start of each year is critical to preventing costly recharacterizations and W-2 corrections later.

Preemptive Strategy for Advisors to Recommend

While employees cannot be required to contribute in a specific way, advisors can encourage sponsors to educate their HPIs on a proactive contribution approach.

• Suggest that HPIs who intend to contribute the full 402(g) limit or more begin the year by making their first $8,000 (or the indexed catch-up/super catch-up limit) as Roth contributions.
• For plans subject to testing: Suggest that HPIs who are also HCEs begin the year by making their first $8,000 (or the indexed catch-up limit) as Roth contributions, even if they do not intend to contribute the full 402(g) limit or more. This is particularly beneficial if deferrals have been recharacterized to pass testing in prior years. 
  • Sponsors can review prior year testing by logging in to their employer portal and,
    • Select 401(k) Plan in the left navigation menu
    • Select Documents
    • Scroll to the Compliance section and review their prior year testing results Summary of Catch-up Contributions page
• This ensures that if they exceed the 402(g) limit or if deferrals are recharacterized as catch-up during testing, they automatically meet the Roth requirement for any catch-up contributions.
• This strategy also protects against payroll or administrative oversight. If contributions were already Roth, no recharacterization is required.

Remember:
The IRS rule does not require that Roth contributions be specifically labeled as “catch-up.”
It only requires that an amount equal to the contributions made above the 402(g) limit be Roth contributions for HPIs.

Summary for Advisors

Need Assistance?

If you have additional questions regarding Roth catch-up contributions, please contact us.