Written By Jenny Kiffmeyer, J.D – The Retirement Learning Center
“I’m interested in engaging with my clients about standard after-tax contribution opportunities in their 401(k) plans. What are the pros and cons of having an after-tax contribution feature?”
Highlights of the discussion
On the pro side, standard after-tax (not Roth) contributions in a 401(k) plan may allow participants to put significantly more money into their 401(k) plans than the standard deferral limit would otherwise permit. For 2026, the basic employee salary deferral limit under IRC §402(g) is $24,500, while the overall annual additions limit under IRC §415(c) is $72,000. After-tax contributions potentially can help a participant fill the gap between their regular deferral limit and the much larger annual additions limit.
Another attractive aspect of making standard after-tax contributions is positioning participants for tax-efficient Roth conversions. This strategy has become increasingly popular as the foundation of the “mega backdoor Roth.” When executed timely, and document permitting, after-tax contributions can be converted “in-plan” to a designated Roth account, or out-of-plan to a Roth IRA with little or no tax consequence. For the strategy to work efficiently, the plan document must 1) allow employee after-tax contributions, and 2) permit in-service distributions of after-tax contributions, and/or in-plan Roth conversions. After-tax contributions can be especially appealing in solo 401(k) plans that cover only a business owner and spouse, or partners and their spouses, as nondiscrimination testing often is not an issue.
While not necessarily “cons,” it is important to be aware of potential pitfalls with after-tax contributions. For example, after-tax contributions are always subject to actual contribution percentage (ACP) testing, even in plans following a safe harbor design. That is because after-tax contributions are “employee contributions” tested under IRC §401(m), not elective deferrals tested under the actual deferral percentage (ADP) test. Failed ACP testing can result in corrective distributions to highly compensated employees (HCEs) or additional employer contributions to non-HCEs. Depending on the safe harbor design and testing method, the plan may be able to disregard certain safe harbor matching contributions for ACP purposes, but the after-tax employee contributions themselves remain subject to ACP testing.
401(k) plans that permit after-tax contributions must be top-heavy aware—even those that follow a safe-harbor design. Adding an after-tax contribution feature to a safe harbor plan affects the plan’s ability to rely on the top-heavy exemption. Additionally, permitting after-tax contributions could contribute to a plan’s top-heavy status, particularly if key employees are the primary users of the feature. Safe harbor contributions may be used to offset top-heavy minimums, but additional employer contributions may still be required. Note that in-service distributions do not solve top-heavy concerns.
Another practical consideration is coordination with the annual additions limit. Some plan documents provide that employer contributions will cease if necessary to avoid exceeding the limit, which can unintentionally reduce or eliminate employer contributions if after-tax contributions are maximized.
| Consideration | Impact/Risk |
Who May Be Affected? |
| ACP Nondiscrimination Testing | Corrective distributions or additional employer contributions are required if the plan fails ACP testing. | · Plan sponsor
· HCEs · Non-HCEs |
| Top-Heavy Testing | Top-heavy status may require additional employer contributions to satisfy top-heavy minimum contributions for non-key employees. | · Plan sponsor
· Non-key employees
|
| IRC §415(c) Limits | After-tax contributions could lead to excess contributions or an unintended reduction/loss of employer contributions or forfeiture allocations. | · Plan sponsor
· Participants |
| Timing of Conversion | Conversion delays, whether self-caused or plan-caused, can increase taxable earnings on the after-tax contributions before conversion to Roth. | · Participants |
Conclusion
Standard after-tax contributions can be a powerful 401(k) design feature, particularly for owner-only plans and participants seeking additional Roth accumulation through a mega backdoor Roth strategy. But the feature is not plug-and-play. Advisors should help their clients confirm document language, recordkeeper capabilities, ACP testing impact, top-heavy implications, and §415(c) coordination before recommending or implementing the strategy.
