From Patience to Paychecks: Congress Wants Taxes Now

Congress figured out that patience isn’t a revenue strategy. Why wait for taxes in 20 years when you can collect them today? It’s like turning a slow cooker into a microwave. And one of the new ‘microwaves’ that Congress has instituted will potentially impact millions of Americans, starting January 1, 2026.

You see, on December 29, 2022, Congress signed the SECURE 2.0 Act, changing retirement plans as we know it. And Section 603 of the Act revealed a simple truth: Congress prefers Roth contributions over pre-tax. Why? Because Roth means tax dollars now, not later. Pre-tax deferrals delay tax revenue for decades, while Roth contributions deliver immediate improvements to the congressional budget. If you had to guess which option lawmakers would choose, the answer is obvious: they want their money today.

And that preference is about to become more visible. Under SECURE 2.0, Congress is gathering more tax revenue upfront by requiring certain catch-up contributions to be Roth. Specifically, this applies to a group called Highly Paid Individuals (HPIs) over the age of 50, and if you’re in that category, your retirement strategy may need a rethink.

What (or who) is an HPI, anyway?

According to Section 603 of SECURE 2.0,^[1] employees who earn above a certain threshold in the prior year will be categorized as HPIs in the current year. In 2026, employees will be assessed based off their wages in 2025. If their Social Security wages (found in Box 3 of their W2) exceed $150,000,^[2] they are an HPI for 2026.

What happens if I’m an HPI?

Well, if you are both an HPI and at least 50 years old, Section 603 may impact you. Normally, employees age 50 and older can make catch-up contributions: extra dollars above the standard 401(k) limit.^[3] For 2026, that regular limit is $24,500, and the catch-up amount adds another $8,000.^[4] And Section 603 says that for HPIs, these catch-up contributions must be made on a Roth basis instead of a pre-tax basis.

Why would Congress do such a thing? You guessed it! Congress wants their tax dollars now, not later. And mandating that contributions be made on a Roth basis is a means to their end.

What’s the problem with this?

This creates two challenges and a twist:

• Challenge #1: High earners in their 50s+ are often in the highest tax brackets of their careers. Conventional wisdom would advise them to contribute pre-tax to defer their tax liability to during their retirement (and presumably, a friendlier tax bracket). Section 603 removes that option, forcing Roth catch-up contributions (read: immediate taxation) at peak income tax levels. Congress gets a higher percentage of the employees’ wages, and they get it sooner.
• Challenge #2: Employers must identify HPIs by reviewing prior-year Social Security wages (Box 3 on Form W-2). This means determining who will be age 50 or older in 2026 and who earned more than$150,000 in 2025. Talk about a headache! Employers should likely collaborate with their payroll provider on how to identify HPIs proactively, thereby easing administrative burden on the business owner(s) themselves.
• The twist: Suppose an employee is hired mid-year. At their former place of employment, they were making well above the HPI threshold. In their new position, however, they will not cross the threshold in the partial year that they worked. Employers should not add together the employee’s W-2 wages at both their current and former place of employment. This means that, even though an employee may receive wages greater than $150,000 from their former place of employment, they will not be counted as an HPI for purposes of their new employer’s retirement plan.

In Short…

Congress is accelerating tax collection by including Section 603 in the SECURE 2.0 Act. This change will not be seamless; expect confusion and errors. That’s why Brown Edwards will soon publish an article specifically oriented to outline corrective steps if HPIs mistakenly make pre-tax catch-up contributions.

Need help navigating these changes for your business? Concerned for your own retirement? At Brown Edwards, we specialize in answering your retirement plan questions, administering retirement plans of all types, and helping business owners design new plans that fit their financial goals. Whether you’re looking to stay compliant with SECURE 2.0 or create a retirement strategy customized to you, we’re here to make it simple and stress-free. Let’s talk about how we can help you build a stronger financial future. My email is jfisher@becpas.com.