How Are Wages Considered to Determine the Need for Roth Catch-up Contributions?

Q: We are a large healthcare organization that owns multiple hospitals. Two of those hospitals each sponsor separate 403(b) plans, though both are members of the same controlled group. We have one employee who works for both entities, with projected FICA wages of $80,000 at each entity in 2025. Assuming actual FICA wages match projections, for purposes of the mandatory Roth catch-up for 2026, will the employee be considered to have earned $160,000, and thus only be eligible to make catch-up deferrals as Roth? Or is the compensation broken down by each plan sponsor, and would thus permit a pre-tax catch-up election?

Kimberly Boberg, Kelly Geloneck, Emily Gerard and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: This is a complicated scenario, but one common in large, health-care-controlled groups. Fortunately, the IRS did address this issue in the proposed regulations published on January 13. Specifically, the proposed regulation states that only FICA wages with the employer sponsoring the plan are taken into account. The employer sponsoring the plan is defined as only the employee’s direct common-law employer, and not the controlled group. Thus, in your case, with two separate entities employing your employee, with each sponsoring separate 403(b) plans, the $80,000 in FICA wages that the employee earned at each employer would not be combined for purposes of the mandatory Roth catch-up for 2026. This employee would be free to elect pre-tax or Roth for any catch-up contributions.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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