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So they can set up the plan before year end and make deferral contributions from a year end bonus for 2025?

They can only defer from W-2 wages not yet paid. They can only defer from wages paid once the 401(k) plan document and trust agreement is executed (signed). They have to be eligible under the terms of the plan. A deferral election is also required. Other than noting today’s date on the calendar, and the other 50 requests coming in today for a plan document to allow deferrals in 2025, that all sounds easy, right?

I will also add that allowing after-tax and Roth could be making it easy for employees to do something stupid, like contribute after-tax contributions without first maxing out their Roth 401(k). That's probably the most obvious issue with adding after-tax contributions in general.

Peter, you asked: Is there another reason why a plan’s sponsor might prefer not to allow nonhighly-compensated employees to make an employee (after-tax) contribution? Yes, there is. When you run an ACP test, you only include the employees eligible for the match. So, if the match allocation has conditions, like last day or 1000 hours, then those employees aren’t in the ACP test. Yay. BUT, as soon as you allow after-tax, everyone eligible to contribute after-tax is now in your ACP test, even those that did not meet the conditions for the match. That could add a whole lot of NHCEs with zeros to the ACP test.

Received a call from an Advisor. He has a prospect with 2 Partners, no employees. It is an LLC taxed as an S Corp and the 2 partners receive W-2 income. The Advisor and CPA want to set up the plan for 2025 and have the partners make the maximum deferrals before year end from a bonus check. The plan can be set up for 2025 but can they make the employee deferral contributions at this late date for the 2025 year? I question it because they take W-2 comp and not Schedule C or K-1.

Im on the advisor side. The downsides I see aren't testing related they are process & communication related. Process - this likely wont happen very often, is the payroll team strong enough for the employer to make sure its handled correctly every time it does happen (they will have to be re-explained the rules every time it happens and I wouldn't be surprised if a payroll person told an employee it wasn't possible on accident. ) Communication - You need to let employees know its possible. Any complicating things like this muddies the water more than adds value to most employee conversations IMO. I'm trying to get participation & savings rates up, most times adding another layer of decisions brings confusion and decreases engagement. If a client came to me and said we have an NHCE who wants this, I would add it to make the client & employee happy. I would mention in employee meetings but very quickly and move on so I avoid creating a confusing discussion. I would be on the payroll calls initially and I would tell everyone to call me if any other employee wants to do this. The participant election of after-tax on the recordkeeper site would have to be managed well too.

Hi - I usually can keep all the SEP & SIMPLE rules straight but this one is flummoxing me for some reason. Our client started a SEP in 2023 with one year of service as an eligibility rule. Employee was hired October 2024. In May of 2025 they updated the SEP to 3 years of service before eligible for the plan. If they do a SEP contribution for tax year 2025 is the employee required to receive a SEP contribution because they were hired under the 1 year eligibility? or does the employee fall under the 3 year eligibility?

I assume that if the former employee does not elect COBRA, they would not get paid or provided any type of subsidy. If that is the case, then there would be no taxable income. Also, even if the COBRA subsidy is provided, the subsidy may not have to be included in income. Generally, when an employer pays COBRA premiums or subsidies directly to a terminated employee and does not control or verify that they actual use the payment for COBRA, the payment be includable as W2 wages. However, if the employer pays the premium or subsidy directly to the carrier or requires the employee to provide proof for reimbursement premiums or subsidies for COBRA coverage that has actually been elected, the payment generally would not need to be included in W2 wages.

Is there another reason why a plan’s sponsor might prefer not to allow nonhighly-compensated employees to make an employee (after-tax) contribution?

Yes absolutely. You can do anything for just NHCE's pretty much, such as profit sharing of varying rates.

If a plan provides that only nonhighly-compensated employees may make an employee (after-tax) contribution, does that meet coverage and nondiscrimination conditions? (Of the employer I’m thinking about, many nonhighly-compensated employees have modified adjusted gross income, or even one’s compensation alone, that precludes the individual from Roth IRA contributions.) Am I right that qualified-plan conditions don’t restrain discrimination against highly-compensated employees? If my guess is right, is there another reason (beyond § 401(a)(17)’s constraint and § 415(c) limits) why a plan’s sponsor might prefer not to allow employee contributions?

The facts stated that the shares would be repurchased by the company at the 12/31/2024 valuation and the money market investment fact doesn’t lead to the conclusion that the shares will be recycled. Confusing recycling within the plan (or whatever technical term is appropriate) with a distribution of shares from the ESOP to the participant allowing the employer to repurchase the shares based on the last valuation is not correct. Generally a distribution requires participant consent. Here the facts are that, if the participant does not consent to a distribution, his shares will be cashed out. This will happen either by the company purchasing the shares based on a stale valuation (per the facts) or, as ESOP Guy guesses, by using cash in the ESOP enabling the plan administrator to reallocate cash and stock between the accounts of active and inactive participants (those who have terminated employment). To do this before 12/31/2025, the plan administrator would need the discretion to declare a special plan valuation date a short time before then based on a stock valuation that is almost a year old. I wouldn’t hazard a guess about how the plan document is drafted here except to note that this may be key to the participant’s situation. Now if the employer was going to do this based on the 12/31/2025 valuation, then the participant would be stuck.

You're just muddying the water unnecessarily. Even you admit that all the plan has to do is distribute the shares if the company wants to buy them. Or more likely the original commentor is using nontechnical language for a very technical event. Since he mentioned the putting the money into a money market more likely the company isn't actually buying the shares but recycling them within the ESOP. To most people in the ESOP and not in the industry the ESOP and company are basically interchangeable when legally they are very different. This company would have to have the most incompetent advisors to have the company buying these shares directly from the plan when there are so many ways to avoid the issue. I stand my advice you would be wasting your money to go to an attorney. Answers to non-technical people should follow the KISS principle: Keep It Simple Stupid works well. Reality does bring up a good point you could ask if they think a money market is prudent to invest your money. Or better take your funds out of the ESOP and get a better set of investments of our choosing in an IRA if you want.

It may be productive to speak to an attorney on this. Generally, the employer may buy the stock from the ESOP based on a valuation as of the date of the transaction. Otherwise the purchase does not meet the requirements for an exemption from the prohibited transaction rules. So there may be a prohibited transaction violation if the purchase is in December, 2025 based on the 12/31/2024 valuation. In contrast, if the employer buys the stock from the participant after it has been distributed to him under the put option rules, the last valuation can be used (generally). Also, many are of the view that the money market as the only investment is not prudent. This is getting some attention in the ERISA litigation world.

From experience, if you have other attachment, like a letter of Reasonable Cause", DOL does NOT forward to IRS.

We work primarily with larger plans that are unlikely to be designed as safe harbor--but that in general, don't need safe harbor protection, because a generous match encourages participation and the ACP test is passed easily. We typically see approximately 10% of a large plan population using the mega backdoor Roth feature--perhaps a couple of hundred individuals in a 2,000 participant plan (typical for our clients). That's enough to slightly degrade the ACP test results (because most using mega backdoor Roth are HCEs) but not enough to cause the ACP to fail. The bigger issue that we see occasionally is 415 limit violations, if someone miscalculates benefits or compensation and the aggregate limit for deferrals, match and after tax exceeds the DC 415 limit. We see a handful of 415 limit violations annually on our larger plans with this feature--I'd approximate the number as about 5 per 10,000 eligible, or 1,000 using the feature. So 415 limit violations are not common, but they do happen.

Happy Holidays from Alabama everyone!!

Is it Adobe Sign? We use the version that comes with our Adobe Acrobat Pro so it is not as robust as the full Adobe Sign or DocuSign, but for us it works and it was a game changer.

I used to subcontract to an actuary who mentioned that Datair's BPD for (I think) EGTRRA had a disclaimer that the 110% rule would not apply in a "never had NHCEs" plan. After all, it is a nondiscrimination issue (and with no NHCEs, blah blah blah). Anyway, I believe she mentioned that the IRS had them take that language out for the PPA version, and I can only guess it's out of Cycle 3 as well.

Agree with Effen, this isn't new and it hasn't gone away and there never is or was an exception for plans without NHCEs. What is interesting is that you say this is an IDP and that provision has been in the plan all along unless I misunderstood and that was added with CB conversion. So presumably they have received an IRS determination letter, probably two, with that anomaly of a disqualifying provision.

As we all try to navigate the year-end craziness and balance life with family and friends, I just wanted to wish everyone a safe, relaxing and enjoyable holiday season!

Ease of administration. The Plan covers multiple employee groups, but only some of the employee groups are VEBA trust funded. The claims administrator intakes and pays all claims, regardless of the employee groups and invoices the employer. This allows the plan sponsor to promptly reimburse the claims administrator for claims paid without having to bifurcate the process into trust-payable and non-trust-payable amounts. They can determine the trust-payable amount on the back end and seek any applicable reimbursement. Claims administrators often do not want to deal with seeking payment from multiple sources, especially in cases where there are multiple different VEBAs and associated subaccounts that fund the plan. Prohibited Transaction Exemption 80-26 (PTE 80-26) allows for certain interest free loans to employee benefit plans. The plan sponsor has a reimbursement agreement between itself and the trust that allows the plan sponsor to pay trust-eligible claims and the trust to reimburse the plan sponsor. Under this structure, there are no assets revering to the employer and no prohibited transaction - the trust is simply repaying an interest-free obligation of the trust (which happens to be to the plan sponsor) incurred by the pre-payment of trust-eligible claims. We have had informal (non-binding) discussions with the IRS regarding this process, during which they agreed that such an arrangement would not constitute a reversion.

Corey, tx for your comments. No one worked 1000+ hours

 1.401(a)(4)–5(b)(3)(ii). What makes you think it might have been revoked? The Code says, "After taking into account payment to or on behalf of the restricted employee of all benefits payable to or on behalf of that restricted employee under the plan, the value of plan assets must equal or exceed 110 percent of the value of current liabilities, as defined in section 412(l)(7)." The "problem" is that Section 412 no longer exists and therefore the reference to "current liabilities" is undefined. Through dialogue between actuaries and the IRS (Gray Book), "any reasonable and consistent method may be used for determining the value of current liabilities and the value of plan assets.”

Not sure I follow your comment about top heavy. Are you saying that none of the XYZ employees have EVER worked 1000 hours in a year, meaning they are all otherwise excludable and therefore don't have to receive a top heavy minimum contribution under SECURE 2.0 rules? If so, then I agree. However if any of them ever do work 1000 hours then they will have to receive a top heavy minimum because the DC plan does not consist SOLELY of deferrals+safe harbor, and therefore doesn't qualify for the top heavy exemption. If this is a concern that there might be XYZ people who work 1000 hours in the future, I'd recommend separating the 401(k)+safe harbor and the profit sharing into separate plans so that you can maintain the top heavy exemption. Anyhow, use $500k for your deduction limit calc. None of the XYZ employees are benefiting in the plan so you can't count their comp.