Two age-fifty-two operators, both grossing $250,000 a year off their side businesses, both maxing catch-up contributions to solo 401(k)s they set up themselves. On January 1, 2027, one loses the up-front federal deduction on the entire catch-up. The other keeps it.
Nothing about their contribution behavior changes. Nothing about their income changes. The only difference is entity form — one runs the side business as an S-corp and pays herself a W-2 salary; the other runs it as a sole proprietorship on Schedule C. On that single difference, the mandatory Roth catch-up rule under SECURE 2.0 §603 turns from a rule that governs the S-corp owner's catch-up contributions to a rule that does not reach the sole proprietor at all.
The regulatory motion has been on the record since the final regulations published September 15, 2025 (IR-2025-91; IRB 2025-40). Every advisor-facing publication has run its "what the rule is" piece — the Kitces Weekend Reading of June 27–28 featured the topic prominently because the effective date is now close enough to matter. And every piece has framed the story from the plan-participant seat: what happens to your catch-up, what your plan document says, what your record-keeper has to configure.
None of it has framed the story from the seat our audience actually sits in — the seat where entity form for the side business is itself the variable, and the Roth catch-up rule is one more input into an entity-choice decision that did not exist eighteen months ago. That is the piece we are running today.
The statute, plainly
The mandatory Roth catch-up rule was added by §603 of the SECURE 2.0 Act of 2022 and lives at IRC §414(v)(7). The operative sentence — §414(v)(7)(A) — is short enough to quote:
“Except as provided in subparagraph (C), in the case of an eligible participant whose wages (as defined in section 3121(a)) for the preceding calendar year from the employer sponsoring the plan exceed $145,000, paragraph (1) shall apply only if any additional elective deferrals are designated Roth contributions.”
Three phrases in that sentence are load-bearing.
"Wages (as defined in section 3121(a))." Section 3121(a) is the Federal Insurance Contributions Act definition of wages. It reaches W-2 wages from a common-law employer, including the officer-of-a-corporation salary an S-corporation owner-employee pays herself. It does not reach a sole proprietor's self-employment earnings (SECA under Chapter 2, a separate regime) or a partner's distributive share (partners are not employees for FICA purposes under §3121(d)). The FICA-wage carve-out is not an interpretive gloss — it is the statutory text.
"From the employer sponsoring the plan." The threshold is tested per-employer, not aggregated across a household's wage sources. A hybrid earner with a $180,000 day-job salary from an unrelated employer, plus a solo 401(k) sponsored by her own S-corp paying her a $70,000 W-2 salary, does not aggregate the $250,000 for §414(v)(7) testing. The solo 401(k) is tested against the $70,000 payroll only.
"$145,000." §414(v)(7)(E) indexes the base annually after 2024. For 2026 contributions, the threshold is applied to 2025 wages and stands at $150,000 (per IRS Notice 2025-67, IRB 2025-49, Dec. 1, 2025).
Per the IRS newsroom, the mandatory Roth catch-up requirement "generally apply to contributions in taxable years beginning after Dec. 31, 2026." Plans have been required to implement the rule since January 1, 2026 — the Notice 2023-62 administrative transition period ended December 31, 2025 — but the final regulations permit plans to operate "using a reasonable, good faith interpretation" for taxable years beginning before 2027. That is compliance cushion for the 2026 implementation year, not a delay of the mandate. Strict application of the final regulations begins with tax years starting January 1, 2027.
Why the coverage keeps running the wrong frame
The trades did not miss the FICA-wage carve-out. Every plan-sponsor bulletin from ERISA specialists, every large-firm summary from ADP, Fidelity, and Vanguard, correctly notes that participants without §3121(a) wages are outside the mandate. The Carry piece on solo 401(k)s states it flatly: "if you report income as net earnings from self-employment under §401(c), you are not considered to have §3121(a) wages." Kitces states it in a single passing sentence. The information is not hidden.
What the coverage does not do — because coverage in the advisor and plan-sponsor trades is not written for our reader — is treat the entity form as the variable. In every piece we have scanned, entity form is taken as fixed: the participant is an S-corp owner-employee, or is a partner, or is a sole proprietor, and the article walks through what the Roth catch-up rule does given that entity form.
Our reader does not sit inside a fixed entity form. Our reader sits inside a live decision. The $200,000-to-$1,000,000 W-2-plus-side-business hybrid earner nearing or past fifty is the reader for whom the S-corporation election on the side business is a recurring question that gets re-evaluated on a rolling calendar. The reasonable-compensation calculus, the state-tax pass-through-entity-tax interaction, the QBI §199A deduction made permanent under the OBBBA, with expanded phase-out ranges effective 2026, the payroll and administrative-cost basket — all of that already sits in the decision. What did not sit in that decision twelve months ago, and does now, is the Roth catch-up mandate.
That is the coverage gap. The trades did not get the statute wrong. They wrote for a different reader.
The entity-choice hinge
Take three hybrid earners, each age fifty-two, each with a full-time day job paying $180,000 in FICA wages from an unrelated employer, and each netting roughly $200,000 from a side business. Each sponsors her own solo 401(k) through that business. The only difference is entity form.
| Entity form on side business | FICA wages from the plan sponsor | §414(v)(7) threshold crossed? | Catch-up must be Roth? |
|---|---|---|---|
| S-corp, owner takes $100K W-2 salary | $100,000 | No | No |
| S-corp, owner takes $180K W-2 salary | $180,000 | Yes | Yes |
| Sole proprietorship (Schedule C) | $0 (SECA earnings, not §3121(a)) | No | No |
| Partnership (K-1, no wage-structured guaranteed payment) | $0 (distributive share, not §3121(a)) | No | No |
Two things fall out of that table that the general coverage does not.
First, the day-job W-2 wages are irrelevant to the solo 401(k) test. The reader with a $180,000 day-job salary at an unrelated Fortune 500 employer does not have her solo 401(k) tested against $180,000. Her solo 401(k) is tested against whatever payroll runs through her own S-corporation. §414(v)(7)(A) tests wages "from the employer sponsoring the plan," not aggregate household wages. This is where practitioner shorthand — "if you make more than $150K you have to do Roth catch-ups" — is materially misleading for a hybrid earner sponsoring her own plan.
Second, the S-corp reasonable-compensation election has been sitting on top of a variable it did not previously know about. Reasonable-comp has always been a load-bearing input into three overlapping calculations: the payroll-tax savings motivating the election; the §199A QBI deduction under the phase-out mechanics; the solo 401(k) employer-nonelective contribution capacity. As of tax year 2027, it is also the input that determines whether the catch-up is pre-tax or Roth. If the owner has been running reasonable-comp high for QBI-optimization reasons — often above $150,000 indexed — the catch-up loses its up-front deduction.
Whether pre-tax versus Roth nets favorably on a lifetime-tax basis depends on distribution-year marginal rates — a separate question we do not resolve here. The point is that the choice between pre-tax and Roth has been taken away from the S-corp owner-employee. For an owner whose S-corp election was marginal to begin with, the Roth catch-up interaction may be the input that tips the calculus. For an owner whose election is strongly favorable on reasonable-comp and QBI axes, it is a cost added to the basket, not a de-election trigger.
Three operator moves for the next six months
What the reader does with the frame splits along entity form.
Sole proprietorship or partnership without wage-structured guaranteed payments. The exempt cases. The move is don't get moved into the mandate by accident. This most commonly happens when a CPA suggests electing S-corp status for reasonable-comp savings, and the resulting reasonable-comp figure crosses $150,000 indexed. Payroll-tax savings from the election now compete against loss of the pre-tax catch-up deduction; the trade may or may not net favorably. Flag it before the restructuring, not after.
S-corp with owner's W-2 wages below $150,000 indexed. Under the threshold. The move is watch the indexing. A reasonable-comp figure at $148,000 today remains below-threshold in 2027 with essentially no risk; $155,000 is over the line.
S-corp with owner's W-2 wages above $150,000 indexed. Squarely inside the mandate. The move is decide whether the pre-tax deduction on the catch-up is worth restructuring around — a multi-variable calculation in which the Roth mandate is only one variable:
- QBI §199A optimization (made permanent by the OBBBA). If reasonable-comp is set to maximize QBI under the phase-out mechanics, restructuring downward may cost more in QBI than it saves in catch-up-deduction status. Do not touch reasonable-comp without running the QBI number.
- Payroll-tax savings on the election itself. Unchanged; if strongly favorable eighteen months ago, still favorable today, minus the catch-up cost.
- State pass-through-entity-tax elections. Several high-tax states offer PTE elections that require specific entity-level wage or income structure; verify state neutrality separately.
- Plan-document scope. The solo 401(k) plan document must actually offer a designated Roth catch-up feature. Many pre-SECURE-2.0 documents do not — and §414(v)(7)(B) provides that a plan without the Roth option cannot accept catch-up contributions at all from over-threshold participants. Plan-document audit this quarter, not next April.
For the broader S-corp election calculus, see our cornerstones on the S-corp election for W-2 earners and when not to elect S-corp. Both are due for a footnote update reflecting this input.
The window that closes December 31
The IRS newsroom language is worth reading twice: the mandatory Roth catch-up rule "generally apply to contributions in taxable years beginning after Dec. 31, 2026," with plans permitted to operate during 2026 under a reasonable, good-faith interpretation of the final regs. That is compliance cushion for the 2026 implementation year — not a delay of the mandate, and not permission to skip Roth catch-ups in 2026.
For a hybrid earner sponsoring her own solo 401(k) through an S-corp, the entity form under which the 2027 tax year opens on January 1, 2027 is the entity form that controls whether the 2027 catch-up is pre-tax or Roth. Restructuring decisions made in the second half of 2026 land in time. Decisions made mid-2027 generally do not — S-corp election revocations are effective on the first day of the tax year in which filed, and a new S-corp election in 2027 carries its own set of considerations. The last six months of 2026 are the clean window. After that, 2027 opens under whatever entity form the business began it in.
Editorial pillar — reaction piece on the SECURE 2.0 §603 coverage cycle. The publication takes analytical positions on coverage convergence when the underlying statutory mechanic is being under-read for our audience. The position above is the publication's; it is not personalized tax, investment, or legal advice for any individual reader. Consult your CPA or tax advisor before restructuring an entity election.