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415(c) and Administering the Mega Backdoor Roth for 401(k) and ESOP Plans


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The 415 test we just performed for plan year 2020 included the sum of the 2020 401(k) deferrals, the lump sum 2020 401(k) match determined and deposited in 2021, [there were no 401(k) forfeiture allocations made in 2020 or in 2021], the 12/31/20 ESOP contribution allocation, and the 12/31/2020 ESOP forfeitures allocation.  Under this test let's say there is 415(c) room to do a Mega Backdoor Roth Contribution and for the sake of argument let's say the room is $20,000.   I assume that this after-tax $20,000 should have been contributed in 2020, with an immediate Roth 401(k) conversion after each payroll contribution if that's how we do it.  What happens if the participant over-contributes, for example, we allowed an after-tax contribution of $22,000 in 2020 vs the finally determined $20,000 that the max should have been.  I assume the $2,000 plus earnings could have been returned by April 15, 2021 to avoid double taxes?  Is that how a Mega Backdoor Roth is administered?  Generally speaking, it always involves a return of excess before April 15?  The earnings are taxable in the year of distribution, so no 2020 W-2 needs to be changed, right?  Your advice would be appreciated.  Thank you!

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On 4/29/2021 at 5:41 PM, Cardscrazy said:

assume that this after-tax $20,000 should have been contributed in 2020, with an immediate Roth 401(k) conversion after each payroll contribution

Yes, VAT for 2020 should have been contributed in 2020. You don't need to immediately convert, but if you don't then you have earnings which are taxable upon conversion. If you go over 415 you refund excess as defined in the plan (likely the VAT/Roth first). You run this risk any/every year you don't know in advance what the component contribution amounts will be. Also, the plan must have a Roth feature, in-plan conversion feature, allow for VAT contributions, and those VAT contributions need to be ACP tested.

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