We look forward to talking with with you.
Contact us today!
When business owners or highly compensated employees want to save beyond the standard 401(k) deferral limit, after-tax contributions often come up as a solution. It’s an understandable instinct — but after-tax contributions are frequently misunderstood, and adding them to a plan without proper preparation can create testing failures, payroll headaches, and recordkeeping burdens that outweigh the benefits.
This is the first and most important distinction to clarify with clients.
Roth 401(k) contributions are elective deferrals subject to the Section 402(g) deferral limit — the same $24,500 cap (for 2026) that applies to traditional pre-tax deferrals. After-tax contributions are a separate category of employee contributions that are not subject to the 402(g) limit. Instead, they count toward the overall Section 415(c) annual additions limit.
While earnings on after-tax contributions grow tax-deferred inside the plan, the participant’s basis and earnings must be tracked separately from other contribution types. This recordkeeping requirement is non-trivial and not every recordkeeper handles it with equal precision.
Critically, the plan document must explicitly permit after-tax contributions, payroll must be able to administer them correctly, and the recordkeeper must separately track after-tax basis, earnings, and any in-plan Roth conversion or rollover activity.
For 2026, the relevant thresholds are:
After-tax contributions can potentially fill the gap between the elective deferral limit, employer contributions, and the $72,000 annual additions ceiling. For example, an employee who defers $24,500 and receives $20,000 in employer contributions could theoretically contribute up to $27,500 in after-tax contributions before reaching the annual additions limit.
That math is appealing — particularly for owners pursuing a “mega backdoor Roth” strategy, where after-tax contributions are subsequently rolled over or converted to Roth treatment. But whether that math actually works in practice depends heavily on what happens at testing time.
The biggest practical limitation on after-tax contributions is nondiscrimination testing. After-tax contributions are subject to the Actual Contribution Percentage (ACP) test under IRC §401(m). If after-tax contributions are made predominantly by owners and highly compensated employees — which is often the case when the feature is added specifically for their benefit — the ACP test may fail, triggering corrective refunds and frustrating the very strategy the contributions were meant to support.
This is particularly problematic when the goal is a mega backdoor Roth. A failed ACP test means refunds to highly compensated employees, which directly undermines the strategy.
One common misconception is that safe harbor 401(k) status solves this problem. It doesn’t — at least not fully. A safe harbor plan may sidestep ADP testing and, in many cases, ACP testing for certain matching contributions, but after-tax employee contributions generally still trigger their own ACP testing. A plan sponsor who adds after-tax contributions without first modeling participation rates across the workforce may be caught off guard by annual refunds.
The right question isn’t simply whether after-tax contributions are permissible — it’s whether they’re workable for this particular employer, with this workforce, this payroll system, this recordkeeper, and this compliance profile.
For plans with broad employee participation and strong recordkeeping infrastructure, after-tax contributions can be a genuinely valuable savings feature. For closely held businesses with limited rank-and-file participation, they often create more compliance friction than retirement benefit.
Before adding after-tax contributions to any plan, CPAs should encourage coordination among all key parties — the TPA, recordkeeper, payroll provider, and ERISA counsel. The review should cover:
Done carefully and with the right infrastructure in place, after-tax contributions can be a powerful savings tool. Done improperly, they become a recurring compliance problem — one that tends to surface at the worst possible time, after the contributions have already been made.
