ERISA-Extra

The recently finalized regulations governing Roth catch-up contributions will require plan sponsors, who offer catch-up provisions, to make operational updates in order to comply with the law’s changes. Plan sponsors will need to work with their recordkeepers and payroll providers to adapt payroll and recordkeeping processes and procedures to ensure compliance. 

What follows is an overview of the regulations, and an explanation of when the requirements become effective. In addition, we provide insights on how plan sponsors can determine which employees are subject to the Roth catch-up rule, what happens to Roth deferrals made by high earners, and what corrective measures are available to plan sponsors when they make classification errors.

Background

The SECURE 2.0 Act of 2022² added a requirement to the catch-up contribution rules that impacts higher-paid participants in a retirement plan^.3 A catch-up contribution is an elective deferral over the 402(g) limit that employees over age 50 may be allowed to make if their plan permits it. The new rule states that highly paid individuals (those who earned above a certain threshold of FICA wages in the prior year) must make catch-up contributions on a Roth basis. This requirement also applies to super catch-up contributions for participants aged 60 to 63.

Date the new regulations come into effect

The Final Regulations confirm that transition relief remains in effect through December 31, 2025, and the mandatory Roth catch-up rule is required for taxable years beginning on January 1, 2026. The provisions set forth in the final regulations generally apply to taxable years beginning on January 1 2027, with a later applicability date set for certain governmental plans and plans maintained under a collective bargaining agreement. The IRS notes that administration of the mandatory Roth catch-up requirement in 2026 must use “a reasonable, good faith interpretation of statutory provisions.” Starting in 2027 when the final regulation becomes effective, plan sponsors must comply with the regulation’s specific interpretations and clarifications.Multi-employer plans (MEPs), however, may be able to take advantage of a delayed effective date that is based on their collectively bargained agreements.

Identifying employees who are subject to the Roth catch-up rule

Plan sponsors must compare each eligible participant’s FICA wages for the prior year to an indexed threshold that currently stands at $150,000 for 2025, subject to future adjustments for inflation. These participants are classified as “high earners” for the upcoming plan year and must make their catch-up contributions on a Roth basis if their previous calendar year FICA wages were greater than this threshold. Plan sponsors must carry out this exercise yearly since the limit will be indexed.

Under the new guidance, a newly hired employee will generally have $0 in FICA wages from the employer for the prior year and is thus not considered a “high earner.” A person who is rehired by the employer would be subject to the requirement if the person received wages from the employer that were over the threshold amount in the prior year.

Plan sponsors may opt to aggregate wages of participants who have wages from multiple employers that place the participants in the high-earner category only if those plan sponsors are part of a controlled group or affiliated service group, or use a common paymaster.

Implementing the Roth catch-up regulation

Plan sponsors will have to review their payroll and recordkeeping systems before deciding on the most suitable approach to complying with and implementing the Roth catch-up regulation. The IRS has stated that plans that use a separate election can require Roth contributions throughout the year, and do not need to make corrections if those amounts turn out not to be catch-up contributions.

Plan sponsors options:

• Eliminate catch-up contributions—Since plan sponsors are not required to offer the catch-up contribution option to their plan’s participants, they could simply stop offering the feature. This may be a viable strategy if plan sponsors find that it requires too much time and effort to identify high earners and enforce the Roth catch-up rules.
• Implement a “deemed” election strategy—This approach automatically treats high earners as having elected the Roth option for their catch-up contributions. While this approach eliminates the need for a separate election for Roth catch-ups, plan sponsors who use this option must still offer participants the opportunity to make a different election.
  

Correction methods are available

Options to correct catch-up contributions that should have been made as Roth are only available if the Plan Sponsor utilizes the deemed Roth election strategy. Otherwise, the only permissible corrective approach is to refund any catch-up contributions that were made as pre-tax. To the extent that correction is available, plan sponsors may make use of two plan-level correction methods. Firstly, with the Form W-2 correction method, plans sponsors can transfer contributions to a designated Roth account and report it on the W-2 (if not yet filed or furnished). Alternatively, plan sponsors may use the in-plan Roth rollover method in which plan sponsors transfer contributions plus earnings to a designated Roth account and report the rollover on Form 1099-R. Contributions less than $250 are subject to a de minimis exception.

Additional steps for plan sponsors

Plan sponsors should coordinate with third-party vendors to modify their procedures for catch-up contributions. Key priorities include:

1. Review plan documents to confirm that Roth contributions are permitted and, if necessary, amend the document to allow this feature
2. Amend the plan documents to reflect plan operations and the requirements detailed in the final regulations
3. Update payroll and recordkeeping systems to identify high earners and to treat affected catch-up contributions as Roth contributions
4. Develop procedures that will place a “stop” on deemed Roth contributions once a participant is no longer subject to the Roth catch-up requirement
5. Revise the plan document (only in cases when no Roth feature is offered) so that high earners and those who do not have Social Security wages cannot make catch-up contributions
6. Use in-person meetings, revised enrollment materials, and updated annual notices to inform employees about the changes and how they can make a different election or opt out.
   

The final regulations are complex and plan sponsors should consult with their ERISA counsel about what steps they may need to take to comply with the new rules.

² SECURE 2.0 Act of 2022, Division T of the Consolidated Appropriations Act, 2023. P.L. 117-328. 12/29/22. Web. Date of Access. 11/11/2025. Text: H.R.2617 — 117th Congress (2021-2022)Read full text on cngress.gov website; Secure 2.0 Act of 2022 Section by Section SummaryOpen the PDF to read the full content. US Senate Committee on Finance. 12/19/22. Web. Date of Access 11/11/2025. 
³ IR-2025-91, Sept.15, 2025.
⁴ This is the 2025 limit. It will be indexed.

Retirement plan sponsors see retirement plans as a way to recruit and retain talented employees. They also view offering a retirement plan as essential to helping their employees accumulate savings needed for a secure retirement.

However, employers must be mindful that while retirement plans offer numerous benefits, they also come with a range of obligations. In particular, employers acting as fiduciaries are required by pension law to fulfill their duties to the plan solely in the interest of plan participants and beneficiaries.⁴ The Employee Retirement Income Security Act (ERISA) details the four primary responsibilities of a fiduciary. Of the four duties, two relate directly to plan investments.

The duty to act prudently with respect to plan assets

The duty to act prudently with respect to plan assets⁵  is of particular importance. Implicit in the prudence requirement is the need to monitor the investment options that the plan offers. The investment review should generally cover various measures, such as a comparison of recent investment performance data relative to an appropriate peer group and benchmark indices. It should also provide an analysis of changes to the investment strategy employed by the investment managers, the investment management team’s members, and management fees.

Employers who lack the expertise to carry out investment functions prudently can hire outside parties with the requisite investment knowledge to assist them. However, doing so does not remove the duty of the plan sponsor to follow a prudent vetting process. This process generally requires the plan sponsor to evaluate multiple plan providers, define specific requirements and request consistent information from each plan provider. Doing so enables an objective comparison that considers all relevant factors.

The plan sponsor must be sure to document the selection process, clearly noting the reasoning behind any decisions made. Moreover, the sponsor must, at reasonable intervals, review the selected provider’s services to ascertain that the provider is performing the agreed-upon services.⁶

The duty to diversify the plan’s assets

Plan sponsors of a non-participant directed plan also have a fiduciary duty to diversify the assets of the plan in order to minimize the risk of large losses unless, under the circumstances, it is clearly prudent not to do so.⁷ In general, the plan sponsor of a non-participant directed plan has a duty to avoid investing a disproportionate share of the plan’s assets in a single security or in a single type of security, unless the investments themselves are adequately diversified, as is the case with mutual funds and exchange-traded funds. Similarly, plan sponsors of a participant-directed plan should provide adequate opportunities for participants to diversify their account investments.

When the plan seeks Section 404(c) protections, it should have a core investment menu that is composed of at least three diversified alternatives, each having different risk and return characteristics with the ability to minimize risk through diversification.⁸ Plan sponsors must also ensure that participants are given sufficient information so that they can make informed decisions about the investment options as well as the opportunity to change investments.

Best practices for designing a defined contribution plan investment menu

Once an employer fully understands what ERISA requires from a fiduciary standpoint, the employer then needs to consider how best to incorporate these duties into a workable strategy for selecting the components of an ERISA-compliant investment menu. What follows are some best practices that employers should consider.

Create a written investment policy

An investment policy statement (IPS) is a series of guidelines set for plan sponsors and other fiduciaries regarding various types or categories of investment management decisions. An IPS essentially provides a framework for setting investment goals and making decisions concerning the plan’s investment management. Although specific content will vary depending upon the type of retirement plan, an IPS generally includes the following information:

• An outline of the plan’s structure and broad objectives;
• The fiduciaries and other parties who are responsible for selecting, monitoring, and managing the plan’s investments;
• The criteria utilized in selecting, monitoring, and replacing plan investments and investment advisors;
• Detailed information regarding investment performance standards and the criteria to be used in measuring investment performance; and
• A schedule of when investment performance will be measured and specifics on the review process.

Be deliberate about investment choices

As noted above, when complying with Section 404(c) requirements the plan must offer at least three diversified alternatives, each having different risk and return characteristics. However, offering only three investment choices may not be sufficient to meet the needs of most plan participants. While there is no optimal number of investment choices, a best practice for plan sponsors should be to offer investments in the plan’s menu that have specific, clearly defined investment objectives. Examples of investment objectives include, but are not limited to, size (large, medium and/or small market capitalization), style (growth, value or blend), income generation, capital preservation and international exposure.

Offer active and passive funds

Equity mutual fund managers follow either a passive or an active style of investing. The passive approach simply aims to mirror the performance of a market index, such as the S&P 500. The manager buys the same stocks that make up the index in the same proportions. Investors in a stock index fund generally benefit when the market index increases in value and experience losses when the index declines in value.

Managers of actively managed funds take a different approach. Instead of seeking to replicate the performance of a broad market index, they buy and sell stocks in an attempt to outperform the market. Both styles have a role to play in a diversified portfolio and can appeal to the different ways participants like to invest and the goals they’re trying to achieve.

Tailor your QDIA choices to your workforce

Often—through inertia, fear, or basic confusion when it comes to investing—some participants may not make an investment choice for their deferrals or employer contributions. When that occurs, the plan can use a Qualified Default Investment Alternative (QDIA) to automatically invest their retirement plan contributions in its default fund. Plans will generally offer the QDIA in order to obtain fiduciary relief if the fund meets Department of Labor requirements. The federal Department of Labor requires that a QDIA must be either:

• An asset allocation/balanced fund, or
• A target-date fund, or
• A professionally managed account.

In determining which QDIA option makes the most sense for the plan, it’s critically important that the plan sponsor undertake a rigorous analysis of the plan’s demographics. The analysis should help identify the primary goals and retirement readiness of the plan participants.

Analyze cost and performance

One primary duty of a plan sponsor is to ensure that fees and costs associated with the operation of the plan are reasonable. The term “reasonable” means that the fees are aligned with going market rates. Benchmarking fees is a best practice that can help determine if they are reasonable. Plan sponsors should be aware, however, that a relatively high fee can be considered reasonable if the plan’s investment managers deliver annual returns that beat the market indices on a consistent basis.

Professional input is advised

Determining an appropriate investment menu for your plan that aligns with your fiduciary responsibilities is a complex task. For assistance in this undertaking or for help in developing an investment policy statement, please consult your plan’s legal counsel and your UBS advisor.

⁴ ERISA Section 40(a)(1).
⁵ ERISA Section 404(a)(1)(B).
⁶ US Department of Labor, Employee Benefits Security Administration. Meeting Your Fiduciary Responsibilities. 2017.
⁷ ERISA Section 404(a)(1)(C).
⁸ Labor Regulation Section 2550-404c-1(b)(3).