“We offer a dollar-for-dollar match of the first 4% of pay contributed to the 403(b) plan, and this has created some confusion among some plan participants who switched from a 403(b) pre-tax elective deferral to a Roth 403(b) after-tax voluntary contribution. The participants claim they now have to contribute more to receive the same amount of matching contribution. I try to explain this is not possible, but am I missing something?”
Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:
What you (or they) may be missing, in the Experts opinion, is that the tax consequences of the voluntary contribution may make it seem as if there is a greater contribution requirement for the Roth.
As you probably know, the actual amount contributed to the pre-tax 403(b) and the Roth 403(b) account is precisely the same. If an individual elects a pre-tax deferral of 4%, 4% of his/her eligible compensation will be deposited to his/her 403(b) account, and if an individual elects a Roth contribution, the same 4% of pay will be remitted to his/her Roth 403(b) account.
The difference is the impact on the participant’s net paycheck or “take home” pay. The pre-tax deferral will NOT reduce the participant’s net pay by 4%, since there is a tax savings involved in the fact that the elective deferral reduces the participant’s taxable income by 4%. Thus, if the participant’s current tax withholding is 40%, there is a tax savings of 40% of the 4%, or 1.6%, reducing the participant’s net pay by only 2.4%.
The participant may then believe that he/she is only contributing 2.4% to receive the 4% match, when in reality the full 4% gross deferral is being remitted to his/her account. With the Roth 403(b), the contribution is after-tax, so there is no actual tax savings on the contribution itself (though distributions from a Roth 403(b) are completely tax-free). Thus, the participant’s net pay is reduced by 4% in order to make the 4% contribution to the Roth 403(b).
Thanks for the question!
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.