Consider Nonqualified Plans When Implementing New Roth Catch-Up Contribution Rules

Many 401(k) plan sponsors are currently discussing implementation of the new Roth catch-up contribution rules, which were published on September 16, 2025, with their third-party plan administrators, payroll vendors, and advisors.[1] This post serves to remind plan sponsors that they should consider their nonqualified deferred compensation plans during these discussions.

Roth Catch-Up Requirement

Under SECURE 2.0, certain catch-up eligible participants, specifically those whose FICA wages for the preceding year exceed $145,000, are required to make catch-up contributions as designated Roth contributions.[2]

The new regulations provide a default rule to facilitate compliance. Under that rule, a plan sponsor may design its plan to provide that those participants subject to the Roth catch-up contribution requirement are “deemed” to have irrevocably elected to treat catch-up contributions as Roth contributions (the “deemed Roth rule”).

The deemed Roth rule is likely to be very popular because it simplifies administration, and, if adopted, employers will be eligible to use two new helpful correction methods if an error occurs in administering the Roth catch-up contribution requirement.

Importantly, to use the deemed Roth rule, affected participants must be “provided an effective opportunity as determined under [existing regulations] to make a new election that is different than the deemed election” (new Treasury Regulation §1.401(k)-1(f)(5)(iv)(A)). The existing regulations state that a 401(k) plan must provide:

an employee with an effective opportunity to make (or change) a cash or deferred election at least once during each plan year. Whether an employee has an effective opportunity is determined based on all the relevant facts and circumstances, including the adequacy of notice of the availability of the election, the period of time during which an election may be made, and any other conditions on elections.

Treasury Regulation §1.401(k)-1(e)(2)(ii) (Emphasis added).

The facts and circumstances under which third-party administrators will implement the “effective opportunity” requirement remain to be seen. For example, will explanatory notices and elections to opt out of the deemed Roth election be provided to participants one time before the start of each year? Will participants be offered the opportunity to change a deemed Roth election at any time during the year?

If a plan sponsor also offers a nonqualified deferred compensation plan that is linked to its 401(k) plan, the deemed Roth catch-up contribution rule could create Code Section 409A issues under the nonqualified plan.

Example of Nonqualified Plan Issue

Code Section 409A generally requires that an election to defer compensation be made prior to the taxable year the compensation is earned, and that election typically cannot be changed. If an employer adopts the deemed Roth rule with respect to its 401(k) plan, and a participant is permitted to change the deemed election during the year pursuant to the effective opportunity requirement, that election could create a violation for Code Section 409A purposes under the nonqualified plan.

Linked nonqualified plans typically avoid the issue associated with changing elections during the year by requiring that participants make their deferral election under the 401(k) plan before the start of the year and prohibiting changes during the year. The deemed Roth rule, however, could, depending on how the effective opportunity requirement is implemented, result in a change to the 401(k) plan election that has the unintended consequence of creating an issue for the nonqualified plan.

Solutions

The issue described above is, of course, only one possible hypothetical scenario. However, there are ways to address it. For example, the two plans could be de-linked entirely. This approach was taken by many employers with linked plans soon after the enactment of Code Section 409A. Given that the year-end is rapidly approaching, there may not be time for plan sponsors to completely de-link their plans in advance of 2026.

An alternative solution is to amend the nonqualified plan to provide that catch-up contributions under the 401(k) plan are disregarded for purposes of nonqualified plan elective deferrals.  While this solution could result in additional cost to the employer (e.g., if a matching contribution on the 401(k) plan catch-ups and a matching deferral under the nonqualified plan are required), it is a design that could avoid the issue described above.  Participants in the 401(k) Plan could change the deemed Roth election during the year, but it would have no effect on the linked nonqualified plan because the nonqualified plan would not consider 401(k) plan catch-up contributions; there would be no change to the election to defer compensation under the nonqualified plan during the year.

Another possible approach is to require that any election by a 401(k) plan participant who is also a participant in the linked nonqualified plan to change the deemed Roth election under the 401(k) plan be made before the start of the taxable year, and no further changes for that year would be allowed. The employer would need to confirm that the third-party administrator is capable of administering the election in this manner. Caution should be exercised, however, (1) to ensure there is adequate disclosure of the deemed Roth election and the opportunity for the participant to make a different election, as well as an adequate period of time before the start of the taxable year during which the participant may make a different election, to comply with the “facts and circumstances” test, and (2) because there may be some risk of noncompliance with the new rules if the opportunity to make a different election is not also provided at some point during the year in which the catch-up contributions are made.

Conclusion

Many employers are in the process of ensuring their 401(k) plans will fully comply (or satisfy a good faith standard of compliance) with the new catch-up contribution rules as of January 1, 2026. As they do so, they should consider their nonqualified plans. While there will often be no issues, discovering an issue after the Roth catch-up contribution requirement has been implemented could be costly.

For 401(k) plan sponsors who also maintain a nonqualified deferred compensation plan, we suggest taking the following steps before implementing the Roth catch-up contribution requirement:

1. Determine how the Roth catch-up requirement will be implemented.
   a. For example, will the deemed Roth rule be adopted?
   b. If the deemed Roth rule is adopted, how will it be administered? For example, under what circumstances will participants be offered the opportunity to make a new election that differs from the deemed Roth election?[3]

2. Review the terms of any nonqualified plans and assess whether the answers to item 1 above will affect the plans. Nonqualified plans are often individually designed to meet the specific needs and goals of the sponsoring employer. Therefore, it is important to review the specific terms of each plan.
3. Implement plan amendments and administrative procedures that ensure compliance by the 401(k) plan under Code Section 414(v)(7) and the nonqualified plans under Code Section 409A.

The potential nonqualified plan issues identified in this post, and others that may be identified when reviewing specific plans, are likely avoidable if addressed in advance of implementing the Roth catch-up contribution requirement.  If you have any questions about the catch-up contribution rules or the potential impact on your nonqualified deferred compensation plans, we are here to assist you. Please contact any member of Verrill’s Employee Benefits and Executive Compensation practice group.

[1] Although the new rules apply to several types of retirement plans, this post focuses on 401(k) plans.
[2] The $145,000 threshold is subject to cost-of-living adjustments.
[3] The focus of this post is on the optional deemed Roth rule and the potential impact of adopting that rule on an employer’s nonqualified plan, but we note there are other decision points for plan sponsors in determining how the Roth catch-up contribution requirement will be implemented. For example, plan sponsors must determine how FICA wages will be calculated and when the deemed Roth election will occur.