True or false: Excess Roth deferrals distributed to highly compensated employees (HCEs) incur no taxes, although the earnings on them are taxed.

The statement is true. Excess Roth deferrals made by highly compensated employees (HCEs) do not incur taxes when they are distributed; however, any earnings on those excess contributions are subject to taxation. This treatment aligns with how Roth contributions are generally treated under tax law.

Roth contributions are made with after-tax dollars, meaning that the contributions themselves are not taxed upon withdrawal. However, if those contributions exceed the allowable limits for contributions under the plan rules, the excess contributions, referred to as excess deferrals, must be corrected. If corrected through distribution, while the contributions themselves remain tax-free, the growth (or earnings) accrued on those contributions will be taxed when taken out, which is consistent with the treatment of excess contributions in a qualified plan.

This policy ensures that HCEs, who are subject to different contribution limits and regulations, are correctly managing their contributions without incurring additional tax burdens beyond the tax liabilities on the earnings. The options that suggest falsehoods do not align with the established guidelines and tax implications associated with Roth 401(k) contributions and excess deferrals.