Setting Up High Earner Roth Catch-Up Deductions

Overview

This article explains how the high earner Roth catch-up deduction rules work for eligible retirement plans, which deduction types are used for the mandatory Roth catch-up contributions, and how to set them up correctly on an employee's deduction record. Use this guidance when configuring retirement deductions for highly paid employees who are age 50 or older and are required to have their catch-up contributions treated as Roth (post-tax) rather than pre-tax.

Background on the High Earner Roth Catch-Up Rule

For highly paid employees, catch-up contributions to certain deferred compensation retirement plans must be made as Roth (post-tax) contributions rather than pre-tax. As a result, high-earner employees who are age 50 or older should not use the standard pre-tax 401k 50+, 401k 60+, 403b 50+, or 457b 50+/457b 60+ catch-up deduction types. Instead, they should use the new HP (Highly Paid) Roth catch-up deduction types described below.

The system does not automatically determine which employees are considered highly paid for this rule. The user must determine eligibility on their own based on IRS guidelines and set up the deductions accordingly.

Eligible Deferred Compensation Plans

The Roth catch-up requirement applies to catch-up contributions for the following deferred compensation plans:

  • 401k

  • 403b

  • 457b

Catch-up contributions for these plans, when made by a highly paid employee age 50 or older, must use the corresponding HP Roth catch-up deduction types.

High Earner Roth Catch-Up Deduction Types

The following deduction types are used for the CATCH-UP portion of the contribution only:

  • HP 401k 50+ and HP 401k 60+

  • HP 403b 50+ and HP 403b 60+

  • HP 457b 50+ and HP 457b 60+

Two of the deduction codes shown on the employee deduction setup screen include:

  • Roth 401k high earners 50+ (AA)

  • Roth 401k high earners 60+ (AA)

How the Calculation Works

When both the regular deferred comp deduction and the corresponding HP Roth catch-up deduction are added to an employee:

  • The regular pre-tax deferred comp deduction is applied first, up to the applicable annual regular deduction limit.

  • Once the regular pre-tax limit is satisfied, the HP Roth catch-up deduction begins calculating and applies to the catch-up amount only, up to the applicable annual catch-up limit for the age tier (50+ or 60+).

IRS annual contribution limits are updated each tax year. Confirm the applicable regular deduction limit and catch-up limit for the current tax year from the IRS or your firm's compliance resources.

How to Set Up High Earner Roth Catch-Up Deductions

For each eligible highly paid employee age 50 or older, both deductions must be added on the employee deduction setup screen:

  1. Open the employee record and navigate to the deduction setup screen.

  2. Add the regular traditional 401k, 403b, or 457b deferred comp deduction. This will calculate up to the full regular deduction limit for the applicable tax year.

  3. Add the corresponding HP Roth catch-up deduction based on the employee's age tier:

    • Use HP 401k 50+, HP 403b 50+, or HP 457b 50+ for employees age 50 or older (but not yet in the 60+ tier).

    • Use HP 401k 60+, HP 403b 60+, or HP 457b 60+ for employees eligible for the higher catch-up tier.

  4. Save the employee deduction setup.

Validation Rules on the Deduction Setup Screen

The employee deduction setup screen includes validation to prevent conflicts between the standard pre-tax catch-up deductions and the HP Roth catch-up deductions:

  • If an HP Roth catch-up deduction (for example, HP 401k 50+ or HP 401k 60+) is added, the system will not allow the pre-tax equivalents (401k 50+, 401k 60+, 403b 50+, 457b 50+, etc.) to be added to the same employee.

  • This helps prevent an eligible high-earner from being set up with pre-tax catch-up deductions in error.

Tips for Accurate Setup

  • Determine each employee's eligibility for the high-earner Roth catch-up rule based on IRS guidelines before setting up deductions.

  • Always add the regular deferred comp deduction and the corresponding HP Roth catch-up deduction together — the catch-up deduction alone will not cover regular contributions.

  • Verify the current tax year's regular deduction limit and catch-up limits before running payroll.

  • Review employee deduction setups annually as IRS limits and eligibility rules may change.

Key Takeaways

  • Highly paid employees age 50+ must make catch-up contributions as Roth (post-tax) using the HP deduction types instead of the standard pre-tax 401k 50+/401k 60+, 403b 50+/60+, or 457b 50+/457b 60+ catch-ups.

  • The eligible HP Roth catch-up deduction types are HP 401k 50+, HP 401k 60+, HP 403b 50+, HP 403b 60+, HP 457b 50+, and HP 457b 60+.

  • The HP Roth deductions cover the CATCH-UP amount only; the regular deferred comp deduction is still required to cover the base contribution limit.

  • The system applies the pre-tax deferred comp limit first, then the Roth catch-up amount.

  • The deduction setup screen validates that HP Roth catch-up deductions and the corresponding pre-tax catch-up deductions cannot both be added to the same employee.

  • Eligibility determination is the user's responsibility; the system does not identify high earners automatically.