Setting Up 401(k) and Roth Catch-Up Deductions for High Earners

Overview

This article explains two methods for setting up 401(k) and Roth deductions when a high-earner employee's catch-up contributions must be directed to a Roth (post-tax) rather than to the pre-tax 401(k). It also outlines the reports available to help track contribution status throughout the year.

Method 1 — Employee Contributes to Both a 401(k) and a Roth

If the employee contributes to both a 401(k) and a Roth, mark the Catch-up box for the Roth and leave that box unchecked for the 401(k). In this scenario, both plans calculate on each payroll until the standard limit is met, then the Roth continues to calculate until the catch-up limit is met. These deductions are linked with a Master ID.

Method 2 — Employee Normally Contributes Only to a 401(k)

If the employee normally contributes only to a 401(k), uncheck the Catch-up box on the 401(k). When the 401(k) reaches the maximum contribution, activate the Roth plan with the Catch-up box marked. In this scenario, watch for the warning that the employee has reached their maximum 401(k) limit so the Roth can be activated at the correct time.

Correcting an Employee Who Has Already Exceeded the 401(k) Limit

If an employee has already gone over the 401(k) maximum for the year — for example, because the Catch-up box was checked on the 401(k) and the system allowed contributions to continue — the excess amount needs to be moved from the traditional pre-tax 401(k) to a Roth deduction.

  1. At the company level, create a Roth deduction if it does not already exist.

  2. Attach the Roth deduction to the employee's profile.

  3. Use a history record to back out the excess amounts from the traditional 401(k) and place those funds to the new Roth deduction.

Tracking Contribution Status Throughout the Year

Several tools help identify where an employee stands relative to their contribution limits during the year:

  • Deduction detail reports show where an employee stands at the year for the contribution amounts.

  • The Payroll Wage, Tax, and Deduction Register displays wages, taxes, and deduction totals per payroll and cumulatively.

  • Additional reports focused on identifying high earners may become available; check current reports periodically.

Key Takeaways

  • There are two setup methods for high-earner 401(k) catch-up contributions that must go to a Roth.

  • Method 1 — Employee contributes to both plans: leave Catch-up unchecked on the 401(k) and checked on the Roth, and link them with a Master ID.

  • Method 2 — Employee contributes only to a 401(k): leave Catch-up unchecked on the 401(k), and activate the Roth with Catch-up checked once the 401(k) maximum is reached.

  • If the pre-tax 401(k) has already exceeded the maximum, create a Roth deduction at the company level, attach it to the employee, and use a history record to move the excess amount from the traditional 401(k) to the Roth.

  • Use deduction detail reports and the Payroll Wage, Tax, and Deduction Register to track contribution status throughout the year.