Catch-up Contributions

What is a catch-up contribution? 

Catch-up contributions give workers aged 50 and older a way to boost their retirement savings, especially if they couldn’t contribute to a 401(k) as much as they wanted to earlier in their career. 

The IRS sets a limit for how much people can contribute to their 401(k). Catch-up contributions go above this limit specifically for those aged 50 and over. 

What are the new regulations going into effect in January 2026? 

Starting in 2026, participants aged 50+ and who made $145,000 (indexed) in FICA wages at their current employer in the previous year must make catch-up contributions into a Roth account. (Remember, regular contributions up to the limit for all ages can be made to either type of account.) These regulations are a part of the Setting Everyone Community up for Retirement (“SECURE”) Act Section 603, which we’ll refer to as the “rule” through these FAQs.  

What does this mean for me as the plan sponsor?

 As a plan sponsor you are central to helping confirm that participants are contributing via Roth when required. Since plan sponsors have all of the information at their fingertips it is imperative that you educate your participant population on making the correct election. This may mean a few different things depending on what your payroll provider is doing. If your payroll company will be automatically switching to Roth when applicable, you should confirm this is being done accurately. If your payroll company is not automatically switching, then you should assist participants in making the appropriate selection. Betterment will do everything we can to educate these participants into making the correct election, and also correcting mistakes after the fact, but you as the plan sponsor hold all the cards to be the first line of defense. 

What does Betterment at Work plan to do to support this? 

Betterment will be taking a two pronged approach.

1. Up-front education. We will email plan sponsors and catch-up eligible participants throughout the year with the information necessary to make the appropriate decisions. We will also enhance our in-app experience to alert catch-up eligible participants to the new catch-up contribution requirements for high-earners.
2. Corrections. Generally, there are two ways to correct mistakes. The first being the “W-2 method” which essentially means fixing via payroll if caught within the plan year. We will assist here by switching the contributions from pre-tax to Roth at your direction after you have corrected the W-2. The second correction method is to “convert” the contributions from pre-tax to Roth. Betterment will automatically process these in-plan Roth conversions after the plan year ends when we have data  indicating this must be done. In cases where we don't have all the data necessary to make this determination, we will take direction from the plan sponsor to determine if we need to process these conversions.

Do “super” catch-up contributions for those age 60-63 need to be made into Roth?

Yes, all catch up contributions are subject to the new rule.

What happens if people erroneously contribute to a traditional 401(k) account? 

Generally, there are two ways to correct mistakes. 

1. The “W-2 method” which essentially means fixing via payroll if caught within the plan year. We will assist here by switching the contributions from pre-tax to Roth at your direction after you have corrected the W-2. 
2. The “in-plan Roth conversion” method allows corrections to be addressed after the plan year ends by converting erroneous contributions from pre-tax to Roth. Betterment will automatically process these in plan Roth conversions after the plan year ends when we have data that undoubtedly indicates this must be done. In cases where we don't have all the data necessary to make this determination, we will take direction from the plan sponsor to process these conversions.

What is the deadline to correct errors?

There are a few applicable deadlines but the most common one will be April 15 of the following year. This is the deadline to avoid double taxation of excess contribution failures. Corrections can and should still be made through the end of the following year to avoid potential plan disqualification.

Do I need to contribute via Roth if I earned over the limit at my prior employer last year?

No, only compensation from your current employer (the same employer offering the retirement plan) is considered for this requirement.

Will my payroll company be making these changes automatically?

This will vary by payroll provider. We recommend reaching out to your payroll company to better understand their practices.

Can we correct this via payroll if we caught the issue in the current year?

Yes, the “W-2 method” can be used to correct this. Therefore, you can make the corrections via your payroll system and instruct us to facilitate moving the funds from traditional contributions (pre-tax) to Roth contributions (post-tax) to match the payroll system.

If correcting via in-plan roth conversion, what year is it taxable?

In-plan Roth conversions are taxable in the year in which the conversion occurs, not the year in which the Roth catch up failure occurred.

Do we have to use the same correction method for all participants?

No, the final regulations allow for separate methods to be used so long as they are applied the same for all similarly situated participants. In practice, this means you can correct errors found within the year by using the W-2 method, but still correct errors found after the plan year by using the in plan Roth conversion method.

What if my plan does not offer a Roth contribution option?

Participants who would otherwise be required to contribute their catch up on a Roth basis, simply will not be allowed to contribute catch up at all.

What happens if we fail compliance testing and pre-tax contributions need to be converted to catch up in order to pass?

If pre-tax contributions are recharacterized as catchup to satisfy testing and the applicable recharacterized catchup must be Roth, then the catch up must be converted to Roth.

Do we need to follow this rule in 2026 since final guidance isn't effective until 1/1/27?

Yes, “good faith compliance” is required for 2026.

Can my employees make a separate election specifically for their catch-up contributions?

Our system does not differentiate regular deferrals from catch-up, so once the deferral limit is reached via pre-tax, they must change to Roth.

Where can I track my employees’ year to date pre-tax and Roth contributions?

Plan sponsors can run a “Participant contributions (individual)” report in their plan sponsor dashboard. 

Participants can see their YTD contributions on their contribution page >> “View details”. It will show a breakdown of YTD contributions by source AND projected contributions.

Plan sponsors can use the Participant Contributions (individual) report and sum up the source for each participant age 50+.

Will our plan be “deeming” the applicable catch-up contributions as Roth?

Yes, if a participant is required to make their catch up contributions via Roth dollars but does not make an election, they will be deemed to have made an irrevocable Roth catch up election to facilitate correction.

What if an employee earns wages with multiple companies in a control group?

Only wages from the current employer are counted. Wages will not be aggregated from other entities within the control group.

What if the owner only earns self employment income? 

Only FICA wages are subject to this rule. If you have self employment income that is not subject to FICA, then the new regulation will not apply to you. 

How can I tell which income is subject to FICA?

The amount subject to FICA will be found on your W-2 in Box 3.

What are the consequences if the deadline is missed? Are there any penalties?

The plan could be considered out of compliance and might jeopardize its tax-qualified status. We recommend fixing the error as soon as administratively possible.

What happens when a participant takes their money before it is being corrected? 

If it's rolled over to another institution, a letter should be sent informing them of the correction needed. The new institution should implement the correction and issue a 1099-R.