One way many employers stay competitive on the job market and responsive to participants’ needs is occasionally fine tuning their 401(k) plans. Adding a Roth 401(k) feature is a great change to consider if you haven’t already. However, first make sure you understand the tax, administrative, and communication issues before you add it to your plan.

What’s The Difference?

From a federal tax perspective, Roth contributions and distributions differ from their traditional counterparts in two key ways. First, elective salary deferrals are irrevocably designated to be made on an after-tax basis, rather than on a pretax basis. Because of this different tax treatment, plans must maintain separate accounts for designated Roth contributions.

Second, if all applicable requirements are met, qualified distributions won’t be subject to federal income tax. Qualified distributions are generally those that occur after a five-year waiting period and after the participant reaches age 59½, becomes disabled or dies.

Why Do It?

A Roth feature allows participants to hedge against the possibility that their income tax rates will be higher later in their careers (likely for younger workers) or during retirement. Even if the rate remains the same, the ability to take qualified distributions free of income tax can be valuable.

However, if a participant’s tax rate will be lower during retirement, Roth contributions may provide less after-tax income than comparable pretax contributions. The result could also be worse than that of ordinary elective deferrals if Roth amounts aren’t held long enough to make distributions tax-free.

Nonetheless, if your organization employs a substantial number of relatively highly paid employees, a Roth 401(k) feature may be well appreciated. There are no income limits on a participant’s ability to make annual elective salary deferrals to a Roth 401(k) account. However, in 2026, there’s a $24,500 limit on total elective deferrals, including both traditional and Roth contributions.

Employers can make matching contributions to Roth 401(k) accounts, provided the plan document specifically permits it. Such contributions don’t count toward the $24,500 limit. However, they do count toward the plan’s overall annual contribution limit, which is generally $72,000 in 2026 (not counting catch-up contributions, which are discussed below).

It’s worth noting — and communicating to your participants — that they can make much larger designated Roth 401(k) contributions than they can for a Roth IRA. The maximum Roth IRA contribution (on a combined basis with traditional IRAs) for 2026 is only $7,500 ($8,600 for those 50 or older at year end). Plus, Roth IRAs are subject to an income-based phaseout.

What About Catch-Up Contributions?

Another reason to consider adding a Roth feature is if your workforce includes relatively older employees. Participants who are age 50 or older may be eligible for additional catch-up contributions if your plan permits them. And the Roth feature has become especially relevant for certain higher-paid employees, because they may need a Roth option to make any catch-up contributions at all.

Beginning in 2026, employees whose 2025 wages from the employer sponsoring the plan exceed $150,000 are generally required to make 401(k) catch-up contributions only to Roth accounts. (That dollar amount will be annually indexed for inflation). What’s more, because of the income-based phaseout, some higher-paid participants may be ineligible for Roth IRA contributions.

The standard maximum 401(k) catch-up contribution for 2026 is $8,000, which applies to both traditional and Roth accounts combined. However, those age 60, 61, 62, or 63 on December 31, 2026, can make a “super” catch-up contribution of up to $11,250, assuming the plan allows it.

What Should Employers Worry About?

For employer-sponsors, the separate accounting required for Roth contributions may raise plan costs and increase the risk of error. One common mistake: treating elected contributions as pretax when the participant elected Roth contributions, or vice versa.

Also, because Roth contributions are treated as elective deferrals for other purposes — including nondiscrimination requirements, vesting rules, and distribution restrictions — plan administration will be more complex. This may increase costs because your third-party administrator and recordkeeper may need to coordinate additional tracking, reporting, testing, and correction procedures. If you handle some or all of these tasks in-house, you could face additional training and labor expenses.

In addition, you’ll need to determine whether plan amendments are required and confirm that your payroll provider or internal systems can properly track all the details involved. These include:

• Both traditional (pretax) deferrals and Roth elections
• Catch-up contributions (including the new requirement for high-income earners)
• Any Roth treatment of employer matching contributions

 
Plan communication can be more challenging as well. Participants need to understand relevant Roth-related topics, such as current and future tax rates, various investment alternatives, and rollover options and the related tax consequences. In addition, make sure participants are aware of the risk of taking distributions before they qualify for tax-free treatment.

Who Can Help?

A Roth feature can make a 401(k) plan more flexible and appealing. But you’ll need to weigh various factors before deciding whether to add one. Contact our employee benefit plan advisors for help assessing whether a Roth feature fits your workforce, understanding the tax and payroll implications, and reviewing your options.