Earlier in 2025, Alight published a blog post and led a webinar about different payroll systems and how they can affect retirement plans, especially when it comes to the Roth catch-up rule. Since then, our discussions with clients have brought up another complicated topic—how this same rule affects retirement plans when several employers, all part of a controlled group, participate in one defined contribution (DC) plan. The IRS released proposed rules in January 2025, and it turns out the impact is more complex than we expected.
Understanding mid-year employer changes and Roth catch-up eligibility
Section 603 of the SECURE 2.0 Act introduces the Roth IRA catch-up mandate, effective in January 2026. Under this rule, catch-up contributions must be made on a Roth basis if a participant earned more than the Roth catch-up wage threshold (initially set at $145,000 in FICA wages, but adjusted for inflation) in the prior year from the employer sponsoring the plan.
While it’s clear that employers are not required to aggregate wages across a controlled group to determine Roth catch-up eligibility, the proposed regulations—specifically §1.414(v)-2(b)(4)—include an important nuance for participants who change employers mid-year within a controlled group.
Key takeaway: employer-specific wage thresholds
If a participant works for more than one employer within the same controlled group during the year, each employer’s prior-year wages are considered separately. Let’s look at an example where an employee works for two separate employers that are both part of the same controlled group, and both employers participate in the same retirement plan.
| Employer in controlled group | Hire date | 2025 FICA wages | 2026 FICA wages |
|---|---|---|---|
| Employer A | 1/1/2025 | $200,000 | $200,000 |
| Employer B | 9/1/2026 | $0 | $100,000 |
- In 2025, the participant exceeded the Roth threshold with Employer A, but not with Employer B:
- Catch-up contributions made in 2026, while employed by Employer A, must be Roth.
- Catch-up contributions made in 2026, while employed by Employer B after 9/1/2026, can be pre-tax.
- In 2026, the participant again exceeded the threshold with Employer A, but did not with Employer B:
- Catch-up contributions made in 2027, if the participant were to be re-employed by Employer A, must be Roth.
- Catch-up contributions made in 2027, while employed by Employer B, can be pre-tax.
This creates a scenario where a participant could be subject to the Roth mandate for only part of the year, depending on their wage history with each employer.
Huge caveat to the Roth catch-up mandate
The scenario described above is based on the proposed IRS rule. The final rule will hopefully simplify this scenario, but we have no assurance that the final rule will be issued anytime soon. Sponsors and practitioners are now in the unenviable position of trying to comply with a highly complex proposed rule which becomes effective in less than six months.
Annual contribution limits still apply
While pre-tax catch-up eligibility is determined per employer, IRS contribution limits are tracked on a calendar-year basis. Continuing with the same scenario, this means:
- As 2025 wages exceeded the Roth threshold with Employer A, pre-tax deferrals associated with Employer A in 2026 should be capped at the 402(g) limit.
- As 2025 wages did not exceed the threshold with Employer B, pre-tax deferrals associated with Employer B can continue up to the 402(g) + catch-up limit.
- However, total contributions across all employers must remain within IRS limits.
Alight’s recommendation
We recommend working with your legal counsel to determine how your plan will interpret the proposed regulations. Then, coordinate with your payroll provider and recordkeeper to implement a process that aligns with how your plan captures elections—whether through a single election or separate IRA catch-up elections.
Given the complexity and typically low volume of mid-year transfers, a manual process may be sufficient for now. Building automated systems based on proposed regulations that may change could be unnecessarily costly.
If you have questions or would like to discuss how this applies to your plan, please contact your Alight representative.
Retirement Benefits
Help your people feel good about what’s to come. We’ll show you how.
