The Mega Backdoor ROTH strategy is a way for highly compensated employees to maximize their retirement contributions by converting 401(k) savings over to a ROTH account within the same plan.
While this strategy can be powerful with a maximum after-tax contribution limit of $46,500*, it can introduce compliance issues, like failing the ACP Test.
*2025 4(15) limit of $70,000 reduced by the $23,500 402(g) deferral limit
Why Mega Backdoor ROTH plans often fail ACP testing:
- The strategy requires after-tax contributions, which are often made by highly compensated employees.
- These contributions are included in ACP testing and if participation among non-highly compensated employees is low, the plan becomes at risk of failing the test.
What happens when the plan fails?
- Excess contributions may need to be refunded.
- Employers might be required to make additional contributions to non-HCEs.
How to make it work?
- First review plan provision requirements and eligibility so that the plan permits voluntary after- tax contributions and in-plan ROTH conversions.
- Understand that Safe Harbor plans do not exempt after-tax contributions from ACP testing.
- Explore testing projections to identify participant demographic.
Bottom Line: The Mega Backdoor ROTH strategy works best for owner only or plans with no NHCEs. If you’re considering a Mega Backdoor Roth, we recommend connecting with Trinity Pension Consultants to ensure the plan design supports it without causing compliance issues.
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