“After tax” contributions to safe harbor 401(k) allowed?

Can a safe harbor 401(k) plan be amended to allow additional “after tax” contributions or is this never allowed? If allowed, is it correct to assume that this “feature” can only be added to the Summary Plan Document with notification to employees prior to the beginning of a new plan year (i.e., NOT mid plan year)?

Thanks for the clarification



It can allow after tax contributions, and due to the testing requirements my guess is that is must be done on a full plan year basis. Here is a discussion of this issue:   http://www.ipsd.com/financial-professionals/retirement_plans/Overview%20-%20Safe%20Harbor%20Plans.pdf



Thanks for the confirmation.  I am working with a business (with about 60 employees) with a safer harbor 401(k) plan.  The ability to contribute “after tax” dollars above and beyond the “normal” employee contribution amount plus employer required match certainly has the potential to help all employees, but in particular the HCE’s who are most likely to have the ability to avail themselves of the option.



Are you aware of the ACP testing and that as a practical matter the HCEs are not likely to get much benefit?



Thanks for your additional input!  Consistent with the issue you raised, per Fidelity “If you change your plan to allow new after-tax contributions, your plan will be subject to the ACP test regardless of your Safe Harbor status.  After tax contributions are typically only made by HCE’s because lower wage earners rarely max out their pre-tax or Roth deferrals.  If the after-tax contribution rate for HCE’s is more than the lesser of +2 or x2 the NHCE rate then the plan will fail ADP testing and a Return of Excess Contribution will occur.  What this means in plain English, is that unless you have significant participation from NHCE’s maxing out regular deferrals and Roth, then the HCE’s that try to contribute will get all their money back in a corrective distribution at the end of the year.  In a very large company where the HCE’s are a relatively small percentage of high wage earners, after tax contributions are more common because more NHCE’s can afford to contribute.”



So it appears, even with safe harbor plans, the ACP test would limit HCE after-tax contrbutions to 2% of compensation under 1.401(m)-2(1)(i)(B), assuming the contribution percentage is 0% for NHCE. (1) Do you concur? (2) Can additional employer contributions be made to pass the ACP test for employee after-tax contributions? E.g. additional matching or discretionary profit sharing of 10% of NHCE comp x 1.25% = 12.50% HCE after-tax contrbution limit?



Note that most plans that allow after tax contributions also permit frequent rollovers from the after tax sub account to a Roth IRA. If a plan discrimination test fails in this situation, the employee will receive a reduced 1099R for the direct rollover to the Roth and an additional 1099R reporting the excess contribution that was not eligible for rollover. An excess regular contribution to the Roth IRA is created in this amount, and the situation must be explained to the IRA custodian because a corrective distribution from the Roth IRA will be required. This is a trade off for employees because if they wait to see if the plan passes the test before doing the Roth rollover, they are likely to have taxable earnings included in the rollover which are taxable.



  • “E.g. additional matching or discretionary profit sharing of 10% of NHCE comp x 1.25% = 12.50% HCE after-tax contrbution limit?”
  • The HCEs will also get the 10% profit sharing. So they would only benefit from the additional 2.5%.
  • A better way would be to have decent match, have that also apply to employee after-tax contributions and most importantly an education campaign.
  • While HCEs might have more discretionary income to make additional employee after-tax contributions. NHCEs (especially those in the lower tax brackets) would be far better of making employee after-tax contributions instead of pre-tax employee deferrals.
  • Even with this, there is likely to be a percentage limit on HCEs. The big help is if you get higher income NHCEs maximizing there employee after-tax contributions.
  • Since employee deferrals are already safe harbor. Any NHCEs switching from Roth 401K deferrals to employee after-tax contributions can help enormously.
  • The crazy part is that even if they do in-plan Roth rollovers (IRRs) and the same money ends up in a Roth 401K account. This counts for ACP testing.


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