Catch-up contributions used to be one of the simplest features in a 401(k): once a participant reached the eligible age, payroll let them defer a little more. SECURE 2.0 changed that. It added a higher catch-up tier for a narrow age band and, for higher-paid participants, required that catch-up dollars go in as Roth. For plan sponsors, catch-up is no longer a toggle in the payroll system. It is a coordinated setup across payroll, the recordkeeper, the plan document and your fiduciary oversight.
This guide is written for employers who sponsor the plan, not for individual savers. It covers what changed, the decisions only the sponsor can make, and the payroll and data work that has to be right before the first affected paycheck.
Why Catch-Up Setup Is a Fiduciary Issue, Not Just a Payroll Setting
Operating the plan according to its written terms is a fiduciary duty. If payroll lets a participant make a pre-tax catch-up when the rules require Roth, or caps a participant at the wrong limit, the plan has an operational failure, even if nobody in HR touched the setting on purpose. That puts catch-up in the same family as late deferral deposits and excess deferrals over the annual limits: errors that start in payroll but land on the plan sponsor.
Where it usually goes wrong:
- Payroll applies one catch-up limit to everyone and never adds the new age-based tier.
- The higher-earner Roth rule is applied to the wrong people because the wage data came from the wrong source or the wrong year.
- The plan does not offer Roth at all, so higher earners are quietly allowed pre-tax catch-ups that the rules no longer permit.
- The plan document, the SPD and actual payroll practice say three different things.
What SECURE 2.0 Changed
1. A higher catch-up limit for a narrow age band
Participants within a specific age range in their early sixties can make a larger catch-up than other catch-up-eligible participants. Eligibility generally depends on the age the participant attains by the end of the calendar year, so payroll must calculate it from date of birth, not from a manual flag. The dollar limits are indexed, so confirm current figures with your recordkeeper or document provider each year rather than hard-coding them.
2. Mandatory Roth catch-up for higher earners
Participants whose prior-year FICA wages from your company exceed an indexed threshold must make any catch-up contributions as Roth. The test generally uses wages from the employer sponsoring the plan, so a new hire with no prior-year wages from you may not be subject to it in their first year. Your payroll provider needs that prior-year wage figure for every catch-up-eligible employee before the new year starts.
3. The Roth question the sponsor has to answer
If your plan does not offer a Roth deferral option, higher-earning participants cannot make catch-up contributions at all, because there is no Roth source to put them in. That is a settlor decision: add Roth to the plan, or accept that some participants lose catch-up. Either answer is permitted. Doing nothing and letting payroll keep running pre-tax catch-ups for everyone is not.
The Sponsor Decisions Payroll Cannot Make for You
Your payroll vendor executes rules; it does not decide them. Before anything is configured, the sponsor needs documented answers to these questions:
- Will the plan offer Roth deferrals? If not, decide how higher earners will be told they can no longer make catch-ups.
- How will the higher-earner election work? Some plans treat a pre-tax election as automatically converted to Roth for catch-up dollars (a “deemed Roth” approach); others require a new election. The plan document has to support whichever method you choose.
- Which entities’ wages count? In a controlled group or after an acquisition, confirm with your advisors how prior-year wages are aggregated and who pulls them.
- Does the plan document need an amendment? SECURE 2.0 amendments generally follow a delayed remedial deadline, but operational compliance starts on the effective date. Your document must eventually match what you actually did. See our guide to plan document restatements.
Payroll and Recordkeeper Setup: A Working Checklist
Use this as your setup self-check. For each line, name the owner and keep the evidence:
- Confirm every catch-up-eligible employee’s date of birth is accurate in payroll, and that the system computes the age tier automatically.
- Confirm payroll can hold separate pre-tax, Roth and Roth catch-up deferral codes, and that each maps to the correct recordkeeper source.
- Pull prior-year FICA wages for every catch-up-eligible employee and flag those above the current threshold.
- Decide the election method (new election vs. deemed Roth) and update the enrollment and election forms to match.
- Test the limit logic: confirm a participant cannot exceed the regular deferral limit plus the catch-up limit that applies to their age tier.
- Confirm the recordkeeper’s data feed accepts the new source codes. Mismatched feeds are the classic failure point; see participant data reconciliation.
- Run a parallel check on the first affected payroll and compare deferrals by source against the recordkeeper’s posting.
- File the decisions, the vendor confirmations and the test results with your plan records.
Communicating the Change to Participants
Participants affected by the higher-earner rule will see a different tax result on their paycheck, and they deserve notice before it happens. Tell them, in plain language, whether the plan offers Roth, how catch-up elections will be handled, and whether they need to take any action. If the change alters plan terms, it may also trigger a summary of material modifications; see our guide to SPDs and SMMs. If you deliver notices electronically, follow your plan’s e-disclosure method and keep proof of delivery.
Where Sponsors Get Hurt
- Using the wrong wage source. Total compensation or W-2 Box 1 instead of FICA wages, or the current year instead of the prior year, misclassifies employees.
- Forgetting mid-year changes. Rehires, transfers between related entities and payroll vendor changes can drop the flag that controls Roth catch-up.
- Testing surprises. Catch-up contributions are treated differently from regular deferrals in nondiscrimination testing and limit testing. If source coding is wrong, the testing results are wrong.
- No correction plan. When a pre-tax catch-up should have been Roth, the fix follows IRS correction guidance and is far easier if caught early. Treat it like any other operational error and document the correction.
What You Can Delegate and What You Can’t
You can delegate most of the execution: limit calculations, source coding, data feeds, testing and participant notices can sit with a qualified administrator and recordkeeper. A 3(16) plan administrator can own the operational duty of making sure payroll and the recordkeeper apply the rules the plan adopted.
What stays with the employer are the settlor decisions (whether to add Roth, which election method to use, when to amend) and the employer-only data that drives the whole process: dates of birth, prior-year FICA wages and which entities belong to the group. No provider can supply those for you. The fiduciary job is making sure that data is accurate, on time and monitored.
Get a Provider That Takes Responsibility
Catch-up setup is one of many places where “the payroll vendor handles it” turns out to mean nobody owns it. Admin316 serves as your 3(16) plan administrator and, unlike most providers, accepts appointment as your plan’s ERISA 402(a) named fiduciary. That means a named party is responsible for overseeing operational changes like SECURE 2.0 catch-up rules, coordinating payroll and the recordkeeper, and documenting that the plan ran the way its document says.
If you are not sure your payroll is ready for the catch-up changes, book a call with Admin316 and we will walk through your setup with you.
