"After tax" contributions to safe harbor 401(k) allowed? | Ed Slott and Company, LLC

"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."

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.

 

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