Employee Contribution Types
There are different ways that employees can contribute to their workplace retirement plan. It’s important for employees and employers to understand the differences, as your plan may not allow all of these contribution types, and different rules apply to each one. This article breaks down the key points.
Pre-Tax vs. Roth Contributions
These contribution types are most commonly associated with 401(k) or other retirement plans and are sometimes referred to as a “salary deferral.” Employees can deposit a portion of their salary into their plan on a pre-tax basis, which reduces taxable income now. However, the contribution is subject to taxation when it is withdrawn.
If a plan permits Roth contributions, employees can deposit after-tax dollars into the plan. When the saver withdraws the funds during retirement, the withdrawal and its earnings are tax-free as long as the Roth account was opened and first contributed five or more years before the withdrawal.
Some savers prefer Roth contributions because future withdrawals, including earnings, interest, dividends, and capital gains, are tax-free. However, both types allow withdrawals at age 59½ without an early withdrawal penalty, and they are subject to Required Minimum Distribution (“RMD”) rules when savers reach age 72.
If your plan supports both contribution types, a saver's contributions on a pre-tax and Roth basis are aggregated together for purposes of applying the annual contribution limits. If a saver has selected both pre-tax and Roth contributions and is entitled to an employer match, the employer match will be deposited into the contribution type selected by the Plan Sponsor. Employers are responsible for setting up all plan features in the payroll system, including where any employer match should be deposited for employees who select both a Roth and pre-tax deferral. Please see our payroll integrations help center content for more details about setting up your plan with your payroll provider.
Upcoming Change: Roth Catch-Up Contributions (Effective January 1, 2026)
Beginning January 1, 2026, certain savers aged 50 or older will see a change in how they can make catch-up contributions to their workplace retirement plan.
Under current rules, eligible savers can choose to make catch-up contributions on either a pre-tax or Roth basis. However, starting in 2026, this flexibility will change for higher earners:
- Catch-up contributions must be Roth: Participants age 50 or older who earned more than $150,000 in FICA wages in the previous calendar year (this amount will be indexed for inflation) will be required to make all catch-up contributions as Roth contributions.
- Participants below the threshold can continue to choose between pre-tax and Roth catch-up contributions if the plan allows both.
- Employer setup: Employers will need to decide whether Roth catch-up contributions are automatically applied (“deemed” Roth elections) or if eligible participants may opt into Roth catch-up contributions voluntarily.
- If the recordkeeping deemed approach is selected, we will track impacted participants’ deferrals and, after reaching the 402(g) limit, convert any pre-tax overage to a Roth contribution automatically. We will also communicate that action to the participant.
This change was introduced under the SECURE 2.0 Act and is intended to increase Roth savings among higher-income earners. We will continue to support plan sponsors with updates and guidance as this change approaches.
What are considered FICA wages?
The IRS defines FICA wages based on Social Security tax wages for the tax year (Box 3 on Form W-2). Consult your payroll provider for additional information.
What if my employees don’t receive any FICA wages?
If the participant doesn’t have any FICA wages, such as the business owner with only self-employment income, they would not be limited to making catch-up contributions as Roth.
After-Tax Contributions
Roth and after-tax contributions to a workplace retirement plan are not the same things, and they have some key differences. As mentioned above, Roth contributions are subject to the annual saver contribution limits, whereas after-tax contributions are not considered under the tax code to be a “deferral” and, therefore, are not subject to those limits. In other words, after-tax contributions to a retirement plan can be more than the $24,500 annual limit (plus the additional $8,000 catch-up amount for savers over age 50) as long as the saver's and employer’s total contributions do not exceed $72,000 in 2026.
Additionally, the tax treatment of Roth and after-tax contributions differ at withdrawal. Any earnings on Roth contributions are tax-free, but earnings on after-tax contributions are taxed as ordinary income. IRS tax code also requires withdrawals of after-tax contributions to include a withdrawal of any earnings associated with those contributions. That said, if Roth or after-tax dollars are rolled into a Roth IRA that was established at least five years before the first withdrawal occurs, both the Roth and after-tax dollars in the IRA will take on the rules of the Roth IRA and not be subject to taxes, penalties or age 72 RMDs, as long as both the Roth IRA and 401(k) account(s) was established more than five years prior to the first withdrawal, and the account holder is age 59 ½ or older.
At this time, our platform does not support after-tax contributions. Therefore, it is critical that when employers submit their payroll files (whether directly or indirectly through a payroll provider), they are sure that all employees’ Roth contributions are not mistakenly listed as “after-tax contributions.” If they are, your contributions file will be rejected and will not be processed. Please be sure to review the specific formatting and other requirements for your payroll files in the "All About Payroll" section.
Note: Starter 401(k)s are a specific type of 401(k) that Congress introduced in the SECURE Act 2.0 of 2022. Though similar to traditional 401(k)s, some key differences include lower employee contribution limits. For 2026, employees can contribute up to $6,000, with an additional $1,000 catch-up contribution allowed for those aged 50 and older.