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 $150,000 (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 Every Community up for Retirement Enhancement (“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. 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 what we can to educate participants and to correct mistakes after the fact, but you as the plan sponsor are the first line of defense through employee education and connecting with your payroll administrator. 

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. Despite our efforts at up-front education, people will still make mistakes. These errors will need to be corrected; please refer to the next FAQ for more. 

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

If mistakes are made, they will need to be fixed, and we've outlined a two-pronged approach to how to address corrections. 

1. Within the plan year: If you learn that an employee has likely made catch-up contributions into their traditional, pre-tax account when they should have been made into their Roth account, you are most likely able to correct this via your payroll system. You can contact your payroll provider for assistance in moving the contributions from the pre-tax account into the Roth account.
2. After the plan year ends: Ideally, most corrections will be made within the plan year. Come 2027, Betterment will process corrections for all participants where we believe an error was made, using the data we have. We’ll identify these participants by running a report that shows the following:
   1. Participants age 50 and over,
   2. They’ve contributed more than $24,500 into a traditional, pre-tax account, and,
   3. Their plan compensation data show a salary greater than $150,000 in 2025. Please note, plan compensation data is not the same as FICA wages. We do not have FICA wages in our system, so we will need you to review the data as well, to help determine if anyone needs to be added or removed from our “bulk” correction. We’ll be in touch in January 2027 with more information on what this process will be.

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.

If the correction is made after the plan year ends, what are the tax implications?

If erroneously made contributions are corrected after the plan year ends (e.g., contributions made into a pre-tax account in 2026 that should have been made into a Roth account, and are corrected in 2027), the assets are taxed in 2027, not 2026. 

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.

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.

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.

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 catch-up contributions via Roth dollars but does not make an affirmative election, they will be deemed to have elected Roth treatment. However, participants always have the right to change their deferral rate to $0 if they do not wish to make Roth catch-up contributions. 

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

Under IRS default rules, only wages from the current employer are counted. While the IRS permits plans to elect to aggregate wages across a control group, Betterment’s platform looks solely at the wages from the specific employer sponsoring the plan.

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.