Do Roth deferrals affect ADP testing?
Yes. Roth deferrals are included with pre-tax deferrals for purposes of the ADP test. However, since Roth deferrals are not tax-deductible, lower-paid participants may be unable to defer at the same level as with pre-tax deferrals. Example: Marge earns $50,000 and has $5,000 available to save for retirement. She is in a combined 25% tax bracket. If Marge makes pre-tax deferrals, she can contribute the full $5,000 to the plan. However, if Marge makes Roth deferrals, she must pay $1,250 (25% of $5,000) in taxes, leaving her with only $3,750 to contribute to the plan. Since Marge is a non-highly compensated employee, her lower deferral percentage would have a negative impact on the ADP test.
