Identifying high-income earners subject to the mandate
The Roth catch-up contribution mandate applies to catch-up eligible participants (i.e., those who are age 50 or older) who had FICA wages for the preceding calendar year “from the employer sponsoring the plan” that exceeded the Roth catch-up wage threshold. This leads to the following questions:
Each of these questions is addressed below.
The SECURE 2.0 Act’s Roth catch-up requirement defines wages as those subject to Social Security and Medicare taxes, with reference to Internal Revenue Code (IRC) section 3121(a). The final regulation clarifies that employers would use Box 3 (FICA wages used for Social Security tax purposes) of Form W-2 to determine whether an employee’s wages trigger the Roth catch-up contribution rule. The IRS declined to use Medicare wages reported in Box 5 of Form W-2 to avoid inadvertent application of the mandate to certain state and local government employees; however, the preamble to the final regulation suggests that during 2026, using Medicare wages reported in Box 5 would be a good faith interpretation of the statute.
Proration of the Roth catch-up wage threshold is not required for a participant’s first year of employment. For example, if a participant is hired in December of 2025 and is paid $125,000 for that month, the participant would not be subject to the Roth catch-up contribution mandate in 2026 because the FICA wages paid by that employer do not exceed the full-year FICA wage threshold.
Importantly, the Roth catch-up contribution mandate would not apply to a participant who did not receive wages subject to FICA taxes in the preceding year (e.g., a partner who only receives self-employment income or certain state or local government employees) regardless of the amount of compensation they received.
Under the statute, the FICA wage threshold is $145,000 for 2024 and is subject to a cost-of-living adjustment in future years. The IRS announced that the limit for 2025 remained at $145,000. [1] The limit for 2026 has not been announced yet and may be delayed due to the government shutdown, but it is expected to be $150,000.
A frequently asked question is how the wage threshold applies — i.e., when determining high-income earners for 2026, would you compare the prior year 2025 FICA wages to the limit in effect for 2025 or the limit in effect for 2026? Based on guidance issued to date, including examples in the final regulations, it appears that the wage threshold for the Roth catch-up contribution mandate is based on the limit in effect for the current year and applied to the FICA wages received during the prior year. For example, whether a participant is subject to the Roth catch-up contribution mandate for 2026 would be based on whether the participant’s 2025 FICA wages exceed the limit in effect for 2026.
The statute does not define the phrase “employer sponsoring the plan.” The default approach under the final regulation is that FICA wages are determined separately for each employer, and wages for an individual who works for multiple employers are not aggregated even if the employers are using a common paymaster or are in the same controlled group. So, if during 2025 a participant receives $130,000 in FICA wages from employer A and $50,000 from employer B, under the default approach the participant would not be subject to the Roth catch-up contribution mandate regardless of whether the employers are related or use a common paymaster.
However, recognizing that the default approach would be difficult for some employers to administer, the final regulation allows aggregation of FICA wages paid by multiple employers if the employers use a common paymaster (in accordance with IRC section 3121(s)) or are part of the same controlled group or affiliated service group. The final rule provides significant flexibility by allowing aggregation of FICA wages with respect to some or all of these other employers. This flexibility will allow employers to choose the aggregation approach based on what is administratively feasible for the employer and its vendors. A plan document would be required to identify which employers are aggregated when determining FICA wages.
FICA wages paid by unrelated employers, even if they participate in a pooled employer plan (PEP) or multiple employer plan, are generally not aggregated. However, if related employers or employers that use a common paymaster participate in a PEP, similar to other plans, these employers would have the option to aggregate FICA wages and to decide which of these employers would be aggregated.
The decision whether to aggregate FICA wages paid by multiple employers is usually driven by how payroll systems are set up, whether multiple employers participate in the same plan or other administrative considerations (such as whether employees frequently transfer between related employers). We generally recommend that employers first review payroll and plan recordkeeping capabilities before deciding whether to aggregate FICA wages and deciding which employers FICA wages will be aggregated.
The final regulation addresses how FICA wages are determined in a year when wages are paid by a predecessor employer involved in an asset purchase. For that year, FICA wages may follow the successor employer’s reporting under either the standard procedure or alternate procedure in IRS Revenue Procedure 2004-53. Thus, when determining if a participant is subject to the Roth catch-up contribution mandate under a plan sponsored by the successor employer, FICA wages may be based on the amount reported on the W-2 issued by the successor employer, whether it includes only the wages it paid (standard procedure) or both the predecessor and successor employers’ wages (alternate procedure).
Note that where the standard procedure is used, the wages reported by the successor employer in Box 3 of the Form W-2 cannot exceed the difference between the Social Security wage base limit for the year and the wages paid by the predecessor employer during the calendar year.
The final regulation does not provide guidance on how FICA wages are determined in the context of a stock transaction. In a typical stock transaction, an employee who remains employed by the acquired entity would generally be considered to have been employed by a single employer for the entire year, and the employee’s FICA wages for the year would be reported on a single Form W-2.
The details matter. Employers should work with their payroll vendors, recordkeepers and advisors to define all the decision points, document decisions, and come up with a plan to ensure that the process for determining the application of the Roth catch-up contribution mandate aligns with the plan’s administrative capabilities and limits. Good faith compliance is needed for 2026, though we recommend complying with the final regulation where feasible to avoid the need for costly and time-consuming modifications in 2026. If you need any help understanding your decision points or how all your administrative pieces fit together, reach out to a WTW consultant today to discuss your specifics.
