Preparing to Face the Challenges of SECURE 2.0 Mandatory Roth Catch-up Contributions

Just when you thought it was safe to assume your benefits package was meeting all your needs, the always unpredictable nature of the regulatory environment governing retirement plans has created a potential issue for highly compensated employees (HCEs). 

Impact of SECURE 2.0 on HCEs

The SECURE 2.0 Act is a recent regulatory initiative aimed at encouraging more employees to take advantage of their employer’s retirement plan benefits. Among the stipulations of SECURE 2.0 is one that could have a significant effect on a certain group of plan participants: HCEs aged 50 or older who fall into the $145,000-plus earnings category and who are eligible to make so-called “catch-up” contributions into their 401(k), over and above the IRS limit on plan-year contributions. 

Effective with the 2026 plan year, any catch-up contributions made by employees who earned more than $145,000 in FICA wages in the prior calendar year must be designated as Roth contributions. While there certainly are benefits to making Roth  contributions—in particular, the fact that Roth contributions can be withdrawn tax free—such contributions may be viewed as a disadvantage by employees who prefer the immediate tax deduction associated with traditional pre-tax contributions. 

Key Takeaways

• Starting in 2026, SECURE 2.0 mandates that all catch-up contributions made by employees who earned more than $145,000 in FICA wagers in the prior calendar year into 401(k), 403(b) or governmental 457(b) plans must be designated as Roth contributions
• Higher paid employees may prefer lowering their current-year taxable income over waiting several years for tax-free Roth benefits
• NQDC plans allow employees to make pre-tax catch-up contributions, reducing current-year taxable income and enabling post-retirement distributions at lower tax rates 

Challenges and solutions

• Contribution limits: For the 2025 plan year, the pre-tax contribution limit into a 401(k) plan is $23,500, with a catch-up contribution limit of $7,500 for employees aged 50-59, and $11,250 for employees aged 60-63 (known as super catch-up contributions).
• Mandatory Roth contributions: The SECURE 2.0 provision mandating Roth catch-up contributions will make it harder for higher paid employees focused on reducing their current-year tax bill if their only savings option is a 401(k), 403(b) or governmental 457(b) plan.
• Nonqualified Deferred Compensation (NQDC) plan benefits: A NQDC plan can address some of the concerns by offering a pre-tax vehicle for catch-up contributions, potentially increasing employees satisfaction with retirement plan options.

Pre-tax vs. Roth Contributions

To illustrate the impact this provision could have when it goes into effect, consider Mike (age 53) and Sally (age 61), two employees earning more than $145,000 in FICA wages in the prior year and aiming to lower their current-year taxable income:

*Subject to change based on 2026 deferral limits

NQDC plans can supplement existing 401(k) plans, allowing higher paid employees like Mike and Sally to set aside an unlimited amount of their income on both a pre-tax and tax-deferred basis, enabling greater retirement savings. Factoring in the forthcoming SECURE 2.0 Roth requirement for catch-up contributions, over time, an employee aged 50 or older could experience even greater tax savings if they have the option of deferring income into a nonqualified plan. This gives employees much more flexibility when it comes to managing their retirement savings and can potentially increase their satisfaction with the options provided to them. In addition, since most retirees fall into a lower tax bracket after their working years are over, withdrawals from NQDC plan accounts are usually taxed at lower rates post-retirement.

Considering a NQDC plan

With SECURE 2.0 requirement for Roth catch-up contributions, now is an ideal time to consider adding a NQDC plan or review your current one.

These plans are not subject to the same statutory limits or ERISA nondiscrimination rules as qualified plans, offering greater flexibility in contribution amounts and timing. In addition, NQDC plans can be customized to provide compensation in a variety of ways, including bonuses and equity. At the same time, NQDC plans allow employers to spread out the compensation expenses over a number of years.

If you determine that a NQDC plan is the right fit for your needs, it’s important to work with a provider who has both the knowledge and the time to be able to discuss all the potential features, funding options, regulatory requirements, and other key elements involved with establishing a plan suited for your specific circumstances.

Newport: An Experienced NQDC Provider with Tailored Solutions

Newport is a market leader in nonqualified plans, with more than 40 years of experience. Our dedicated professionals offer comprehensive solutions, including plan consulting and design, participant communications, financing strategies, distribution processing, trust services, and a tailored online experience for nonqualified plan sponsors and participants.

With SECURE 2.0 impacts, now may be the best time to consider a Newport NQDC plan. We will help craft a customized plan that enables tax-advantaged retirement savings for key participants and increases employee satisfaction with their savings options.

For more information, please Contact Us

This material has been prepared for informational purposes only. It is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Consult your own tax, legal and accounting advisors before making any decisions. Newport Group, Inc., an Ascensus Company, and its affiliates do not provide tax, legal or accounting advice.