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Roth Deferrals For 401(K) Plans: Employers Should Know All Their Options

By: Chad Halbur

Roth 401(k) accounts have grown in popularity because of their unique tax treatment, but employers should understand the tax, regulatory, and administrative considerations before adding this feature to a plan.

What are Roth 401(k) Deferrals?

A Roth 401(k) is a plan provision available within a 401(k) retirement plan, and its tax treatment is similar to that of a Roth IRA. When a contribution is made to a Roth 401(k), the individual does not receive an income tax deduction at the time of contribution. Instead, the tax benefit is realized at withdrawal. The account grows tax-free, and qualified distributions of both principal and earnings are not subject to federal income tax. The Roth 401(k) feature may be particularly appealing to participants who are younger, expect higher future earnings, or desire tax-free income in retirement.

The Roth 401(k) has two advantages over the Roth IRA. 

  1. The maximum contribution to a Roth 401(k) is significantly higher than the Roth IRA. For 2026, an individual may contribute up to $24,500 annually (or $32,500 if age 50 or older) to a 401(k) on a combined Roth and traditional basis. Certain participants ages 60 through 63 may be eligible for an enhanced catch-up contribution of up to $11,250, depending on plan design. By comparison, the Roth IRA contribution limit for 2026 is $7,000 (or $8,000 if age 50 or older).

  2. Higher income individuals may use a Roth 401(k) regardless of income level. Unlike Roth IRAs, Roth 401(k) contributions are not subject to adjusted gross income phase-out limits, making them accessible to high-earning participants who are otherwise ineligible to contribute directly to a Roth IRA.

Tax considerations

A Roth 401(k) feature does not increase the maximum amount a participant may defer annually into a 401(k) plan. The annual elective deferral limit applies on a combined basis to both traditional pre-tax and Roth contributions. For 2026, a participant cannot exceed $24,500 in total employee deferrals (excluding catch-up contributions).

In order for a participant to make a Roth deferral, they must forego the immediate tax deduction associated with a traditional 401(k) deferral. For some participants, particularly those in higher current tax brackets, this trade-off may not be advantageous. However, Roth deferrals may be well-suited for younger participants or those who expect to be in a higher tax bracket during retirement.

Historically, Roth 401(k) accounts were subject to required minimum distributions (RMDs). However, beginning in 2024, SECURE Act 2.0 eliminated lifetime RMDs for Roth 401(k) accounts, aligning their treatment more closely with Roth IRAs. As a result, participants are no longer required to take RMDs from Roth 401(k) balances during their lifetime.

There is no absolute assurance that Roth contributions will remain tax-free upon withdrawal indefinitely. Congress retains the authority to change tax laws, and future legislative action could alter the tax treatment of Roth accounts.

Administrative considerations:

Roth 401(k) deferrals are treated similarly to traditional 401(k) deferrals for plan testing purposes. Roth deferrals are included in nondiscrimination testing, such as the ADP test, and are generally eligible for employer matching contributions, subject to plan terms.

  • Employers must establish procedures to track Roth versus traditional deferrals and ensure accurate reporting and recordkeeping.

  • Employers should provide education to employees explaining the differences between Roth and traditional 401(k) contributions, including tax implications at contribution and distribution.

  • In order to implement the Roth feature, employers must formally amend their plan documents.

  • Employers must also coordinate with payroll providers to establish separate payroll deduction codes for Roth deferrals.

Roth 401(k) plans provide a valuable tax-diversified option for retirement savers. Higher contribution limits, expanded catch-up rules, and the elimination of lifetime RMDs for Roth accounts increase their appeal. Employers should consider both plan design and communication strategies to support participant understanding and compliance.

As always, Cornerstone Private Asset Trust Company, LLC appreciates the opportunity to keep you up to date on important law changes. If you should have any questions or wish to discuss the Roth 401(k) feature in more detail, please feel free to contact us at 866-200-6528.