Starting in 2026, higher-income earners participating in qualified defined contribution plans, those earning $150,000 and more, aged 50 and older will experience a major shift in their retirement savings options. They will no longer have the option to make pre-tax 401(k) catch-up contributions. Instead, all catch-up contributions for these individuals will be required to be made on a Roth (after-tax) basis.
While the Roth contributions still allow earnings to grow tax-free and keep qualified withdrawals tax-free as well, this adjustment removes one of the primary attractions of traditional catch-up contributions: the ability to defer income taxes until retirement.
For advisors and producers working with businesses to support highly compensated employees this rule change presents both a challenge and an opportunity. Many higher earners rely on catch-up contributions to maximize retirement savings while managing current-year income tax exposure. With pre-tax deferral no longer available for these contributions, these participants may want to seek alternative ways to maintain tax flexibility, income control and long-term accumulation potential. For higher earners age 60-63 who had expected to utilize Secure 2.0’s newly created “super catch-up” contributions, the new Roth requirement is particularly troublesome as it eliminates income tax deferral on nearly 1/3 of their expected total deferrals. An additional planning tool ought to be introduced to help achieve their intended outcomes.
The role of Nonqualified Deferred Compensation (NQDC) plans
This change creates a timely opening for advisors to help employers enhance or implement non-qualified deferred compensation (NQDC) plan as a strategic complement to the 401(k). Unlike qualified plans, NQDC arrangements allow for greater flexibility in how and when income is deferred and taxed, helping high income earners offset the loss of pre-tax catch-up contributions. By expanding or refining these plans, advisors can help their clients:
- Provide executives with additional pre-tax deferral opportunities beyond qualified plan limits.
- Offer customized payout options aligned with each participant’s financial goals.
- Maintain a competitive edge in attracting and retaining key talent.
Additionally, a NQDC plan can be structured to work in tandem with the new rules – using deferred compensation to reduce immediate tax impact while allowing high income earners to continue to use Roth contributions as an electable, alternative path for income tax-free growth of retirement funds.
NQDC plans must comply with requirements of IRC §409A to avoid current income taxation and penalty taxes. In order to defer taxation on vested contributions within NQDC plans, it is essential that the benefits remain subject to a substantial risk of forfeiture and that the plan remains unfunded. Any assets earmarked by NQDC plan sponsors to help meet obligations due under a plan would remain subject to attachment by sponsors’ creditors.
Corporate-Owned Life Insurance (COLI) as a strategic funding tool
With increased importance of NQDC plans, corporate-owned life insurance (COLI) becomes a more relevant and strategic tool for employers looking to retain high earners and informally fund benefit obligations. COLI offers tax-advantaged account value growth and liquidity to meet future benefit payments. The tax-deferred growth of COLI policies complements the goals of NQDC arrangements, providing a programmatic funding mechanism for executive benefit obligations, especially in a changing regulatory environment.
For advisors, this represents a key opportunity to:
- Educate clients on how COLI complements NQDC programs.
- Demonstrate the tax and balance sheet benefits of COLI funding.
- Strengthen executive benefit strategies in light of the evolving regulatory environment.
A balanced perspective on the Roth requirement
While the upfront income tax deferral is lost, Roth Catch-Up contributions offer tax-free growth and qualified withdrawals in retirement are income tax free. When paired with an NQDC plan, they can offer a powerful balance of tax diversification and income flexibility.
Advisors can help clients see this change as a strategic planning opportunity rather than a limitation- encouraging a more holistic approach to retirement savings that includes both after-tax and tax-deferred elements.
Looking ahead
As 2026 approaches, the landscape of retirement planning is evolving and so should the conversations surrounding it. This is the moment for advisors to:
- Reassess deferred compensation strategies,
- Introduce or expand NQDC plans, and
- Explore COLI as a long-term funding option.
By helping your clients prepare now, you can position them – and their executives - for continued success in an environment where flexibility, tax efficiency, and strategic balance matter more than ever.
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COLI products issued by Massachusetts Mutual Life Insurance Company (MassMutual) and its subsidiary, C. M. Life Insurance Company, both of Springfield, MA 01111-0001.
