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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.

No issues there, it's not like they have to follow the rules for safe harbor plans' lengths. Just make it a full plan year with deferrals effective 12/23 or whatever. But as John referenced, no document means no plan means no deferring out of order.

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?

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.

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.

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

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.

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.

Exactly, this is either an owner-only play or may work in a very large plan that otherwise easily passes ACP testing, but is essentially a nonstarter in small plans that cover NHCEs.