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As a CPA, you may have clients who ask whether a 401(k) plan can allow after-tax contributions. The question often comes up when business owners or highly compensated employees want to save more than the regular 401(k) deferral limit. After-tax contributions can be useful, but they are frequently misunderstood and can create testing, payroll, and recordkeeping issues if not implemented carefully.
After-tax contributions are not the same as Roth 401(k) contributions. Roth contributions are elective deferrals subject to the Section 402(g) deferral limit. After-tax contributions are separate employee contributions that are not subject to the Section 402(g) limit, but they are generally counted toward the overall Section 415(c) annual additions limit. Earnings on after-tax contributions remain tax-deferred while in the plan, but the participant’s basis and earnings must be tracked separately.
This distinction matters because after-tax contributions can sometimes allow a participant to contribute beyond the regular elective deferral limit. But the plan document must permit them, 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 elective deferral limit for 401(k) plans is $24,500, with catch-up contributions potentially available. Total defined contribution annual additions are generally limited to $72,000, excluding catch-up contributions. After-tax contributions may help fill the gap between the elective deferral limit, employer contributions, and the overall annual additions limit.
Example: An employee who defers $24,500 and receives $20,000 of employer contributions could potentially have room for $27,500 of after-tax contributions before reaching the $72,000 annual additions limit.
The biggest practical limitation on after-tax contributions is nondiscrimination testing. After-tax contributions are generally tested under the Actual Contribution Percentage (ACP) test under Section 401(m). If after-tax contributions are mostly made by owners and highly compensated employees, the ACP test may fail, requiring corrective refunds or other corrections. This can be especially frustrating where participants expected the after-tax strategy to support a “mega backdoor Roth” approach — that is, an in-plan rollover of after-tax contributions to Roth treatment.
Safe harbor 401(k) status does not automatically solve this problem. A safe harbor plan may avoid ADP testing, and in many cases ACP testing for certain matching contributions, but after-tax employee contributions generally still trigger ACP testing. As a result, a plan sponsor that adds after-tax contributions without modeling participation may be surprised by annual refunds to highly compensated employees.
The planning question is not simply whether after-tax contributions are allowed. It is whether they are workable for the employer’s workforce, payroll system, recordkeeper, and compliance profile. For some plans — especially those with broad employee interest and strong recordkeeping support — after-tax contributions can be a valuable savings feature. For other plans, particularly closely held businesses with low rank-and-file participation, they may create more frustration than benefit.
When advising clients, CPAs should encourage coordination among the CPA, TPA, recordkeeper, payroll provider, and ERISA counsel before after-tax contributions are added. The plan should confirm:
Done carefully, after-tax contributions can be a powerful tool. Done improperly, they can become an annual compliance problem.
