by: Kristin Tocket, CPC, QPA, QKA, TGPC
One of the most urgent and significant upcoming changes taking effect under SECURE 2.0 requires Highly Paid Individuals (HPIs) aged 50 or older to treat their catch-up contributions as Roth. Although this change was originally set to take effect in 2024, the IRS extended the transition period through the end of 2025. Employers must make a good-faith effort to comply by January 1, 2026, with enforcement of the final regulations beginning January 1, 2027. As these deadlines approach, plan sponsors should take practical steps to update their systems and processes and be able to document their progress toward meeting these new requirements.
Before addressing the operational impacts, it’s important to understand how HPIs are defined, and how they are not necessarily the same as a highly compensated employee (HCE) as defined for purposes of nondiscrimination testing. An HPI is determined solely by prior-year FICA wages as reported in Box 3 of the employee’s Form W-2. This may result in HPIs who are non-highly compensated employees (NHCEs) for testing purposes, and likewise, there can be HCEs who do not meet the FICA threshold to be considered HPIs.
For the 2026 calendar year, an HPI is anyone who earns more than $150,000 in FICA wages during 2025. Individuals with earned income, including sole proprietors and partners in a partnership, do not receive FICA wages, so they are exempt from this mandate, even if their income exceeds the applicable limit. Similarly, employees of state and local governments who are exempt from Social Security will not have Box 3 wages and likewise will not be subject to the mandate. The HPI wage limit will be indexed annually for inflation, and because this determination is made on a year-by-year basis, a participant may be considered an HPI in one year but not the next. Since the rule depends entirely on a participant’s FICA wages each year, it is essential that payroll records are kept accurately and the plan sponsors closely track any employee who may be approaching or exceeding the applicable limit.
A participant’s FICA wages are treated separately for each employer, meaning wages from different employers are generally not combined when determining when an employee’s FICA wages exceed the dollar limit. However, if members of a controlled group or affiliated service group utilize a common paymaster, then the plan document may require that FICA wages are aggregated when determining if an employee is a HPI. This may make it simpler for some groups to comply with the Roth catch-up rules.
Normally, an employee must make an affirmative election to have their 401(k) contributions made on a Roth basis. To ease administration and reduce compliance risks however, plan sponsors may utilize a deemed Roth election. Under the deemed Roth election, plan sponsors may treat catch-up contributions for HPIs as Roth, even if the HPI does not affirmatively elect Roth or attempts to elect pre-tax. In order to use this safeguard, the plan sponsor must provide timely notification to participants regarding how their catch-up contribution will be treated. Sponsors may deliver this notice prior to the start of the year, with their safe harbor or automatic enrollment notices, or after the year begins once an HPI is identified. Either way, it must be delivered prior to the first payroll in which catch-up contributions are deducted. We recommend that employers speak with their payroll provider to determine whether they can accommodate a deemed Roth election in their system.
If a plan does not currently offer Roth, the plan sponsor is not required to add it; however, this means that HPIs will be unable to make catch-up contributions during that year. Fortunately, the absence of a Roth feature does not prevent non-HPIs from being able to contribute catch-up on a pre-tax basis. A key point plan sponsors should keep in mind is how this interacts with ADP testing. Some HPIs may not normally contribute enough to reach the annual deferral limit but may rely on reclassified catch-up contributions to satisfy ADP testing. If the plan doesn’t permit Roth and the plan fails the ADP testing, any HCE who is also an HPI would be unable to reclassify any of their pre-tax deferrals as catch-up. This can be a significant consideration for plans that rely on catch-up reclassification to minimize refunds to their HCEs.
As the effective date quickly approaches, we recommend that plan sponsors take the time to review their current processes and coordinate with their payroll providers and recordkeepers to accurately identify any participants who will be considered HPIs for 2026. Taking the time to review these procedures now will help ensure good-faith compliance in the upcoming year. If there are any questions on determining whether a participant is an HPI, sponsors can feel free to reference the information below or contact your plan consultant at our office.
Is the Participant Age 50+?
If YES, see below.
Were their FICA wages more than $150,000 in 2025?
If NO, Participant is a NON-HPI for 2026 and may make pre-tax or Roth catch-up (if the plan permits Roth).
If YES, Participant is an HPI for 2026. ALL catch-up contributions MUST be Roth. Pre-Tax catch-up is not permitted.