Roth deductions

[52626]

Accounting Question:

When a plan offers Roth Contributions, is there an order in which deductions are withheld from the paycheck.

Pre Tax Deferrals with held first

then Federal Income Tax and Social Security

The question is if the participant has several after tax deductions, is the Roth the first or is there a hierarchy as to which after tax gets withheld first?? Or does it matter???

[My 2 cents]

I don't work on 401(k)s and also have no involvement with Roths, but wouldn't amounts contributed as Roth contributions be purely after-tax? I don't know how they interact with Social Security. Otherwise, I would go with it not mattering.

[Belgarath]

Both pre-tax and Roth deferrals are subject to Social Security.

[hr for me]

From a payroll side, yes it does matter. You might have to consider your order since Roths/Deferrals can often be a percentage. Yes it is a percentage of a certain income, but if that % is too high, you might not be able to take out other deductions (health insurance premiums for example). What is the max % a person can defer/contribute? Is it so high that other deductions could be a problem? If not, order might not be as important.

If so, I would communicate to employees for example that required taxes, then other Section 125 deductions (that they can't change throughout the year without a change in status) and possibly garnishments (depending on your state law) would come first and then Roth contributions and then voluntary deductions (that aren't Section 125) such as a legal defense fund, charity donations, etc. But they would need to understand what would happen if they stop paying voluntary deductions because they don't have enough income.

For those in this situation, I would consider putting together a worksheet where they can input their wages, deductions, taxes, etc and see what % they would be able to contribute without going negative (if they are trying to stash as much as possible) if that many employees are having some voluntary deductions cut due to the Roth % or having to cut their % if that is last on the list.