Author: Kristi Hill

Kristi Hill advises employers on a wide range of employee benefit matters and enjoys applying her legal expertise to help employers attract and retain valuable employees. She works with employers to find practical and workable solutions to problems they face that comply with applicable legal requirements.

Is Your 401(k) Plan Ready for Roth Catch-Ups in 2026?

Beginning January 1, 2026, “high earners” must make catch-up contributions on a Roth (after-tax) basis. The Treasury Department issued final regulations on this SECURE 2.0 change last month. Although the regulations are technically effective in 2027, plans must operate in good-faith compliance in 2026. Plan sponsors that permit catch-up contributions should understand these requirements to ensure smooth implementation in January.

Key Requirements

Participants age 50 or older in 2026 may make up to $8,000 in “catch-up contributions” (contributions above the general 401(k) limit, $24,500 in 2026) if permitted by the plan. Plans may increase the catch-up limit to $11,250 for participants turning 60 to 63 in 2026.

For 2026, employees whose 2025 FICA (W-2 Box 3) wages exceed $150,000 are considered “high earners.” Generally, only wages from a common law employer are considered for this purpose, but employers under common control or using a common paymaster may elect to aggregate wages. Notably, partners with only self-employment income and certain state/local government employees without FICA wages are thus not subject to the Roth-only rule.

Plan Document Requirements

Plans without a Roth feature must add one to continue offering catch-ups to high earners. If the plan allows Roth catch-ups for high-earners, it must make them available to all catch-up eligible participants. It may not require all catch-up contributions to be Roth, however.

Plan sponsors who are under common control or using a common paymaster should consider whether to elect the optional wage aggregation rule. If no election in made, wages are not aggregated.

Plans may adopt a “deemed Roth” rule under which catch-up contributions become Roth once statutory or plan limits are reached, provided high earners are given an “effective opportunity” to opt out—for example, by opting out of catch-up contributions or electing to have any deferrals that would otherwise be deemed Roth distributed to them. The regulations do define “effective opportunity,” but clear advance notice to high earners with a meaningful opportunity to opt out, possibly in an annual notice before the start of the year, would likely suffice.

Correction Options

The regulations provide three methods to correct pre-tax catch-up contributions that should have been Roth. A plan must apply the same method to all similarly situated participants for the year. The Form W-2 and in-plan Roth rollover correction methods are available only to plans that (a) include a deemed Roth election and (b) maintain written practices and procedures for Roth catch-ups.

  1. Form W-2 Correction. If identified before the Form W-2 for the year of deferral is issued, transfer amounts to the participant’s Roth account and report the contributions as Roth on the Form W-2.
  2. In-Plan Roth Rollover. Roll over the contributions to the participant’s Roth account and report the rollover on a Form 1099-R for the year of the rollover. A plan is not required to otherwise allow in-plan Roth rollovers to use this method.
  3. Distribution. Distribute the excess pre-tax contributions and report the distribution on Form 1099-R.

The correction deadline generally extends to the last day of the year following the year of contribution to avoid a plan qualification failure, although earlier correction deadlines (for example, 402(g) or ADP) continue to apply. Earlier correction is therefore recommended.

No correction is required if the incorrect pre-tax amount is $250 or less or if FICA wages are determined to exceed the high earner threshold only after the correction deadline.

Action Items for Plan Sponsors

  1. Review Plan Design. Plans that do not permit Roth contributions should consider adding them. High earners in plans that to not permit Roth contributions will not be able to make catch-up contributions beginning in 2026.
  2. Consider Aggregation. Decide whether to adopt the optional wage aggregation rule for identifying high earners (for example, to simplify administration).
  3. Evaluate a Deemed Roth Provision. A deemed Roth provision is required to use the Form W-2 or in-plan Roth rollover correction methods and reduces the need for affirmative elections, but requires clear communication and strong payroll and recordkeeping systems.
  4. Communicate with Employees. Inform catch-up eligible participants who are high earners of the new Roth-only rule and their options, including opt-out rights under a deemed Roth provision.
  5. Adopt Correction Procedures. To apply the W-2 or in-plan Roth rollover correction methods, the plan must (a) include a deemed Roth election (subject to opt out and with appropriate notice), and (b) establish policies and procedures relating to Roth catch-ups. Otherwise, the distribution correction method is required.
  6. Implementation and Monitoring. Establish procedures to identify high earners using prior-year Form W-2 Box 3 wages and coordinate with services providers to ensure proper Roth designation.
  7. Plan Amendments. Most plans will require amendments, but the deadline for SECURE 2.0 changes is generally December 31, 2026, even though operational compliance is required sooner.

Please reach out if you have questions or need help with these changes, including preparing Roth catch-up procedures or participant notices.

This alert is necessarily general. Consult with one of our attorneys or another qualified advisor if you have questions about your specific situation.

Supreme Court Raises Bar for Dismissing ERISA Prohibited Transaction Claims

The Supreme Court made it easier for plaintiffs to bring ERISA prohibited transaction claims last month when it unanimously adopted a lower pleading threshold for plaintiffs making such claims. Effectively, the Court’s decision in Cunningham v. Cornell University allows participant plaintiffs to more easily withstand a plan sponsor’s motion to dismiss, potentially opening the door to increased litigation targeting ERISA plans for common transactions with service providers. This is expected to result in more costly and time-consuming litigation, even in cases that do not ultimately have merit.

Key Holdings

The Court’s central holding establishes that plaintiffs alleging prohibited transactions under ERISA are not required to address statutory exemptions to such transactions in their complaints. Instead, the responsibility to invoke and ultimately prove these exemptions now rests squarely with plan sponsors and fiduciaries as affirmative defenses.

For example, under ERISA a plan sponsor who engages and pays service providers (such as recordkeepers and investment managers) engages in a prohibited transaction. Congress understandably also created an exemption to the prohibited transaction rules for payment of reasonable compensation to necessary service providers. The Court held that the structure of the statute, which places the prohibitions in one section and the exemptions in another, suggests that Congress intended for the exemptions to function as limitations on the prohibitions, rather than as integral elements of the prohibited transactions themselves. Thus, plaintiffs do not have an obligation to address the exemptions—rather, it is the defendant’s obligation to raise and demonstrate that an exemption applies.

Implications for Future Prohibited Transaction Litigation

This ruling may lead to an increase in ERISA litigation, as more claims survive initial dismissal motions, resulting in costly discovery and ongoing litigation, even in cases that appear to fall squarely under the ERISA prohibited transaction exemptions. As a result, more defendants may consider settling even meritless claims. The Court recognized these concerns but ultimately concluded that they could not override the clear statutory text and the established framework of ERISA. The Court suggested that trial courts utilize several existing procedural tools to mitigate the risk of meritless claims, but it remains to be seen how trial courts will approach the issue.

Practical Considerations for Plan Sponsors

Given the heightened litigation risk, there are several actions plan sponsors should take to anticipate potential challenges and ensure robust fiduciary practices are in place to withstand scrutiny.

1. Review Service Provider Agreements: Ensure that compensation paid to plan service providers from plan assets is reasonable. It is also advisable to maintain documentation demonstrating the necessity of the services provided and the reasonableness of the compensation paid for those services.

2. Document Fiduciary Processes: Maintain thorough records of decision-making processes related to plan management to provide evidence of prudent fiduciary conduct, particularly with respect to the selection, retention, and ongoing monitoring of service providers.

3. Stay Informed on Legal Developments: Keep abreast of evolving ERISA litigation trends and consider consulting legal counsel to assess and mitigate potential risks.

This decision underscores the importance of proactive fiduciary oversight and may signal increased judicial scrutiny of retirement plan management practices. If you would like to improve your fiduciary governance or assess how to better protect yourself from ERISA litigation, please do not hesitate to reach out to one of our experienced attorneys.

ERISA Benefits Law Recognized in 2025 Best Law Firms List

We are pleased to announce that ERISA Benefits Law has been recognized as a Tier 1 law firm for both Employee Benefits (ERISA) Law and Employment Law – Management in the 2025 edition of Best Law Firms®. We have received this honor for Employee Benefits (ERISA) Law every year since 2016 when we first opened, and for Employment Law – Management every year since 2021.

We are honored to be recognized for our service and appreciate the confidence our colleagues and peers have in us. We look forward to continuing to provide outstanding service and practical solutions to our clients’ complex questions.

Erwin Kratz and Kristi Hill Recognized in 2025 Best Lawyers and Ones to Watch in America Lists

We are delighted to share that Erwin Kratz and Kristi Hill have once again been recognized in the 2025 editions of The Best Lawyers in America® and the Best Lawyers: Ones to Watch® in America. They are grateful to their peers for selecting them to receive this honor. Please join us in congratulating them on this achievement!

Erwin Kratz and Kristi Hill Named to 2024 Southwest Super Lawyers and Rising Stars Lists

We are pleased to announce that Erwin Kratz and Kristi Hill have been selected to the 2024 Southwest Super Lawyers and Rising Stars lists for Employee Benefits. This is Erwin’s fourth consecutive year on the Super Lawyers list and Kristi’s third year on the Rising Stars list.

The Super Lawyers list is an exclusive list, recognizing no more than five percent of attorneys in the Southwest. The Rising Stars list recognizes no more than 2.5 percent of attorneys in the Southwest. Super Lawyers, part of Thomson Reuters, is a research-driven, peer-influenced rating service of outstanding lawyers who have attained a high degree of peer recognition and professional achievement. Attorneys are selected from more than 70 practice areas and all firm sizes.

Please join us in congratulating Erwin and Kristi on their selections.