Roth Catch-Up Contributions for Highly Paid Individuals (HPIs): What Employers Need to Know
Author
Julie Thompson | QKA, QPA, Retirement Plan Consultant | Julie has built a career on helping clients navigate the complexities of retirement plans. With over two decades of experience in the industry Julie brings a wealth of knowledge in qualified plans, including 401(k) Profit Sharing Plans, Defined Benefit Plans, and Cash Balance Plans.
Insights from Julie Thompson, Retirement Plan Consultant, Nydia Retirement Solutions
For years, catch-up contributions have been fairly straightforward. Employees age 50 and older who wanted to save more for retirement could contribute beyond the standard annual deferral limit.
That changed for certain employees at the start of 2026.
Under SECURE 2.0, employees classified as Highly Paid Individuals (HPIs) who earned more than $150,000 in prior-year FICA wages are now required to make any catch-up contributions on a Roth basis. That means those dollars are taxed now, rather than later.
At first glance, this might sound like a minor operational update. In reality, it touches payroll systems, plan documents, Roth provisions, recordkeeper coordination, employee communication, and administrative workflows.
For employers with older plan documents or no existing Roth provision, this has required real operational preparation. At Nydia Retirement Solutions, we have been working with plan sponsors, payroll companies, and recordkeepers to navigate these changes and identify where potential breakdowns can occur.
What Is an HPI?
HPI stands for Highly Paid Individual. It is important to understand that this is not the same designation as a Highly Compensated Employee (HCE), which is used in nondiscrimination testing. It is also not tied to ownership or key employee status. The HPI determination is based strictly on compensation.
Under SECURE 2.0, employees with more than $150,000 in FICA wages in the prior year are considered HPIs. If those employees are age 50 or older and eligible for catch-up contributions, those catch-up dollars must be contributed as Roth. The determination is made annually using prior-year compensation.
As an example: an employee earning $165,000 in 2025 is an HPI for 2026. If that employee contributes beyond the regular 402(g) limit in 2026, the catch-up portion must go in as Roth. This threshold will be indexed for inflation in future years, but for 2026 the working number remains $150,000.
For a broader look at what else SECURE 2.0 requires of plan sponsors right now, see our overview: What Plan Sponsors Need to Know About the SECURE 2.0 Amendment.
What Actually Changes
The most common misconception is that all contributions for HPIs must become Roth. That is not the case. Only the catch-up contribution portion is required to be Roth.
The employee can still make regular pre-tax deferrals up to the annual limit. Once they cross into catch-up territory, those excess contributions must switch into the Roth bucket. As one of our consultants summarized it: it is mostly about which money goes into which bucket.
Operationally, though, that distinction matters quite a bit.
Why This Creates Operational Challenges
This rule sounds simple on paper. In practice, multiple systems and parties must coordinate correctly for contributions to be processed properly. That includes the employer, payroll provider, recordkeeper, TPA and retirement plan consultant, and plan document provider.
If even one part of the process is missed, contributions may be coded incorrectly. The payroll company needs to know that catch-up dollars should now flow as Roth, and the recordkeeper needs to receive that information correctly. For plans that already have Roth provisions and modern payroll integrations, the transition is more manageable. For others, particularly those without Roth features, this becomes a larger amendment and operational project.
Some Plans Do Not Yet Have Roth Provisions
One of the biggest issues we have seen in preparation work is that many plans do not allow Roth contributions at all. That creates an immediate problem.
If an HPI must make Roth catch-up contributions but the plan does not permit Roth deferrals, the plan sponsor cannot simply bypass the requirement. The plan must be amended to add Roth capability. That means employers may need to amend plan documents, update payroll coding, coordinate with recordkeepers, educate participants, adjust employee elections, and review payroll feeds and contribution mapping.
This is why proactive review matters so much now that the 2026 plan year is underway. Our Administration and Compliance services are designed to help plan sponsors stay ahead of exactly these kinds of changes.
Why Payroll Coordination Matters
The HPI determination is based on prior-year compensation, which means employers can identify impacted employees before contributions are processed. That creates an opportunity to prepare.
For example: an employee who earned $175,000 in 2025 and turns 50 in 2026 will have all catch-up contributions coded as Roth. Knowing this in advance allows payroll systems to be set up correctly before the first catch-up dollar is processed.
Without correct setup, contributions may continue as pre-tax incorrectly, recordkeepers may reject files, corrections may become necessary, and participant tax reporting may become more complicated. This is why the transition is a team effort between the employer, payroll provider, recordkeeper, and retirement plan consultant.
Will This Affect Compliance Testing?
This is an area where some confusion has been circulating. The answer is generally no.
Catch-up contributions are already excluded from ADP testing, so changing the tax treatment of those dollars does not materially affect nondiscrimination testing. ADP testing is generally unaffected, Safe Harbor status is unaffected, 401(a)(4) testing is unaffected, and profit-sharing calculations remain compensation-driven.
The change is primarily administrative and operational, not compliance-testing related. That said, operational failures can still create correction work if contributions are processed incorrectly. For a deeper look at how annual testing works and what it actually measures, see our post on why passing annual testing does not mean your plan is optimized.
What Employers Should Be Doing Now
Retirement plan operational changes almost always take longer than expected because they involve multiple vendors and systems. Now that the 2026 plan year is underway, employers with HPIs should prioritize the following.
Confirm whether your plan allows Roth contributions. If your plan does not currently permit Roth deferrals, a plan amendment is necessary before HPIs can make catch-up contributions at all.
Identify your HPIs. Review 2025 compensation to determine which employees exceeded the $150,000 threshold and are age 50 or older in the plan year. This is the foundation for everything else.
Coordinate with your payroll provider. Payroll systems must identify when catch-up contributions begin and ensure those dollars switch to Roth coding automatically.
Confirm recordkeeper readiness. Not every recordkeeper handles payroll integration the same way. File formatting and contribution source mapping should be reviewed and tested.
Educate your employees. Many participants will not understand why their catch-up contributions are now taxable. Clear, proactive communication is part of running a well-administered plan. Visit our Participant Resources for tools you can share directly with your team.
The Bigger Picture Behind SECURE 2.0
This rule is part of a broader trend within SECURE 2.0. Congress continues moving retirement plans toward increased Roth taxation, greater automation, more operational complexity, expanded participant access, and enhanced reporting and compliance expectations.
For employers, that means retirement plans increasingly require active oversight and coordination, not just passive annual administration. If you are a business owner evaluating your overall plan strategy, our Business Owner Resources are a good place to start.
Why a Boutique Retirement Plan Consultant Makes a Difference
Large bundled providers often process retirement plans through standardized workflows and large service centers. When operational changes like the Roth catch-up rules take effect, employers frequently need more proactive coordination than a call center environment can provide.
At Nydia Retirement Solutions, we work directly with employers, payroll providers, and recordkeepers to identify operational gaps before they become costly correction projects. That includes reviewing plan readiness, identifying HPI employees, coordinating Roth implementation, helping payroll teams understand coding requirements, assisting with plan amendments, and supporting participant communication.
The goal is not simply compliance. It is making sure the plan operates correctly in real-world conditions. Learn more about how we work and who we are.
The Bottom Line
The Roth catch-up rules for HPIs may seem like a narrow technical update, but they represent a meaningful operational shift for many retirement plans. For employers with older plans, no Roth provision, or fragmented payroll coordination, the time to act is now.
The good news is that the HPI determination is based on prior-year compensation, so employers can identify impacted employees and work through the operational steps before any catch-up contributions are processed incorrectly.
In 2026, it is no longer just about whether employees can make catch-up contributions. It is about making sure those dollars go into the right bucket.
Questions about how this rule applies to your plan? Reach out to us at nydiaretirement.com or call (602) 944-1515. We are here to help.
