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Roth Catch-Up Regulations Finalized

Effective January 1, 2026, employees with FICA wages that exceed $145,000 in the preceding calendar year will only be able to make age-based catch-up contributions on a Roth basis.

What does this mean for my 401k plan?

If your plan has a Roth source, your plan may provide that participants that exceed $145,000 in wages in the prior year are “deemed” to have designated pretax catch-up contributions as Roth contributions.

If your plan does not have a Roth source, participants who exceed the FICA wage threshold will not be able to make catch-up contributions. Pre-tax deferrals will need to be stopped when the annual limit is reached.

What do I need to do?

  • Watch for communications from your recordkeeper.  Recordkeepers are providing resources to guide plan sponsors through the changes. 
  • Notify your participants of the change.  Your recordkeeper can provide a notification template.
  • Contact your payroll provider to ensure they are ready for the updated regulations.
  • Reach out to our team at Arcwood Financial. We can review your plan and provide assistance with any necessary updates.

Resources

Fidelity Roth Catch-Up Resource Center

IRS Issues Roth Catch-Up Final Regulations

Vanguard Roth Catch-Up Guide

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Top CFO Questions: Who’s Driving 80% of Healthcare Costs And What Role Do Prescription Drugs Play?

Top Questions a CFO Should Be Asking Who’s Driving 80% of Our Healthcare Costs—And What Role Do Prescription Drugs Play? In most organizations, a small percentage of employees are responsible for the majority of healthcare spend. And one of the biggest, often overlooked drivers? 💊 High-cost prescription medications. From specialty drugs to recurring therapies, prescription costs can quietly consume a massive portion of your budget—with little visibility or strategy behind them. “There’s nothing you can do about Rx pricing…” That’s what many CFOs believe — because in fully insured plans, they’re often right. But with self-funded plans? You finally get access to the data that lets you do something about it. Smarter health plans start with visibility. And visibility starts with self-funding. 🔍 Want to uncover how prescription meds are shaping your healthcare spend? Let’s take a closer look: https://zurl.co/B0eWD

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Pension-Linked Emergency Savings Accounts (PLESAs)

Under the SECURE 2.0 Act of 2022, employers can now offer Pension-Linked Emergency Savings Accounts (PLESAs) within defined contribution retirement plans, such as 401(k), 403(b), and governmental 457(b) plans. These accounts are designed to help employees build emergency savings without compromising their long-term retirement goals.

Who Can Participate?

PLESAs are available to employees who are eligible to participate in their employer’s retirement plan and are not classified as highly compensated employees (HCEs). Generally, an HCE is an individual who earned more than $150,000 in the preceding year, though this threshold may be adjusted periodically. Employers may also set additional eligibility criteria, provided they are consistent with the plan’s terms and applicable laws.

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New 401(k) Rules for Long-Term, Part-Time Employees

Recent changes under the SECURE Act of 2019 and SECURE 2.0 Act of 2022 have expanded 401(k) plan eligibility to include long-term, part-time (LTPT) employees. Employers need to understand these rules to ensure compliance and avoid costly corrections.

What Changed?

The SECURE Act of 2019 requires employers to allow employees who have worked at least 500 hours per year for three consecutive years (starting from 2021) to make 401(k) deferrals, beginning in 2024.

SECURE 2.0, passed in 2022, reduces the requirement to just two consecutive years for plan years beginning in 2025. This change means that employees who work at least 500 hours in 2023 and 2024 will be eligible to defer into the plan as early as 2025.

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De Miniums Employee 401k Participation Incentives

Under the SECURE 2.0 Act, employers are now permitted to offer small financial incentives—such as gift cards—to encourage employees to begin participating in 401(k) or 403(b) retirement plans. This provision, effective for plan years starting after December 29, 2022, introduces specific rules and limitations:

Key Rules and Limitations

  • Maximum Value: The incentive must be “de minimis,” defined by IRS Notice 2024-2 as not exceeding $250 in total value. This amount can be provided either as a lump sum or in installments, provided the cumulative value does not surpass $250.
  • Eligibility: Only employees who are not currently making elective deferrals to the plan are eligible for these incentives. Employees already participating in the plan cannot receive these incentives, even if they choose to increase their contributions.
  • Funding Source: The incentive must be paid by the employer using non-plan assets. It cannot be funded through the retirement plan itself or structured as an employer matching contribution.
  • Tax Implications: These incentives are considered taxable income to the employee and are subject to standard income and employment tax withholding and reporting requirements, unless they qualify for another specific tax exclusion.
  • Plan Qualification: Since these incentives are not treated as plan contributions, they are not subject to retirement plan qualification rules, contribution limits, or nondiscrimination testing.

Practical Considerations

Employers can structure these incentives in various ways, such as offering a $100 gift card upon initial enrollment and an additional $100 after six months of continued participation, ensuring the total does not exceed the $250 limit. However, offering incentives like raffles or prizes with values exceeding $250 per individual may not comply with the “de minimis” standard and could raise compliance concerns.

Before implementing such incentive programs, it’s advisable to consult with legal or tax professionals to ensure compliance with all applicable regulations and to address any potential complexities.

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Questions?

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