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Our daily software won't trade any amount that would cause someone to exceed the 402(g) limit. So, the $.04 would be sitting in cash. I would use the $.04 towards the employer contribution and tell the client they owe him $.04, which is the same as Larry's suggestion.

Unless the rules have changed they can roll over to an inherited IRA. Distributions due to death are exempt from the 10% ( I believe a code 4 is used on the 1099-R along with another code). Yes - any distribution eligible for rollover is subject to the mandatory 20% withholding. Since this distribution is eligible for rollover, it follows that the 20% withholding rule applies.

I vote for no reporting, and booking only the $25k deferral and ignoring the four cents.

For large employers, the passing margin on the ACP test is typically much wider than it is for the ACP and just a small percentage of HCEs will request in-plan Roth conversions. The plan design is quite viable for them.

This design is very common for large Silicon Valley employers. ACP testing isn't an issue because people are paid so well that many well-paid employees aren't HCEs, due to the top paid group/20% rule. It's typical for people earning $200K+ to be NHCEs. Aggregate match rates tend to be lower for HCEs than for NHCEs because of how the formulas work. A common match design in the Silicon Valley is a simple 50% match. So assume two employees each defer the (2019) $19,000 maximum, both get a $9,500 match, but the employee making $100,000 has a match rate of 9.5%, while the employee making $200,000 has a match rate of 4.75%. For this reason, we regularly see ACP tests where the ACP for NHCEs is HIGHER than the ACP for NHCEs. In this environment where a mix of both higher paid NHCEs and plain old HCEs both want to make after-tax contributions and convert their after-tax contributions to Roth, with an ACP test with lots of room, the only effective constraint on the after-tax contribution is the Section 415 limit ($56,000 in 2019). It's simple math to back out 401(k) and match to get to the after-tax contribution amount (in this example, $56,000 - $19,000 - $9,500 = $27,500). Hundreds of employees will contribute to this limit. With regards to the IRS potentially challenging the two step "back door" conversion, I've seen that concern raised, but some of the largest companies in the Valley offer this benefit. Most companies have decided that IRS won't challenge these mega companies--the worst may be to announce that the technique will be prospectively disallowed. So more companies are offering this. The major recordkeepers now support immediate standing conversions of after-tax to Roth, so it's not even a two step process. The effect is an end-around on the 402(g) limit for Roth contributions. But it happens all the time.

Actually, it'll work in more situations than just owner only. A small firm, with a wide disparity in wage may benefit as well, but at a cost. A small law firm, for example, with 10 lawyers and 4 staff may implement it, at the cost of a QNEC to cure the ACP failure - which might be insignificant enough to justify doing so. In addition, a (very) large firm with many HCEs who can make use of the top paid election to "eliminate" a number of highly paid individuals from being "defined" as HCEs can do so - but only with respect to the NHCEs. We have as a client a large law firm (1000+ employees) who do this - which effectively allows the associates - who would be HCEs but for the top paid election to make these kinds of contributions/conversions. Of course, staff can also do so if they choose. It's a numbers game.....