John Feldt ERPA CPC QPA

Jakyasar, a reasonable classification is only necessary for passing coverage when the 70% ratio test for coverage is not satisfied. If there are only two employees and both are HCEs, then coverage is deemed to pass, so the exclusion can be done by name without creating any issues.

Take a look at Treasury Regulation section 1.401(a)(4)-12 and see if that helps. Keep in mind that in the reg, the term “plan” is actually the tested “plan”, which is the combined employer DC contributions and DB benefit amounts (other than match) from both the CB and the 401(k).

Must track separately also because, unlike 457(b) distributions, it will generally remain subject to the 10% excise tax if distributed as taxable before age 59.5.

Ditto.

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.

Right, it can be funded as after tax only up to the lesser of 100% of compensation or the $70,000 dollar limit. The extra $7,500 catch-up is only available as a deferral.

Meaning, you evaluate the plan as a whole for determining if all the NHCEs got a gateway. Keep in mind if the OEE group itself is not included with the others in testing, then no gateway applies to the OEE group - unless for some very strange reason the OEE group had an HCE getting more as a percent of pay than the younger NHCEs in that OEE group and you cross-tested the OEEs - but I’ve never seen that happen.

Am I understanding this correctly? Yes. Is there any way to bypass the testing for mega roth backdoor after tax contributions? Have zero eligible nonhighly compensated employees, no testing needed. In other words, employing only highly compensated employees who meet the age/service/entry requirements = no testing needed.

And the plan must have the safe harbor provisions. It is not considered safe harbor if the plan does not say it is safe harbor.

Tangentially related, perhaps: my understanding that a housing allowance paid is not counted for 415 compensation purposes and a deferral cannot be withheld from such a payment (it’s already not subject to income tax). Deferrals are withheld from income. My preference is to have the section 107 “minister of the gospel” elect a fixed dollar deferral amount. And because the eventual retirement payment from the plan can also be counted as housing allowance (up to the limits allowed) and thus not subject to income tax, perhaps they be especially careful about electing Roth, as that could result in paying unnecessary income taxes.

That’s correct.

Regardless, the plan document likely needs to add some interim good-faith language by the end of 2026 to comply with the law in written form. Thus, the written plan would comply with the possibility that an employee could have have deferred a catchup and their prior W-2 Box 3 FICA wages exceeded the limit that would require such catchup be treated as Roth.

My understanding is that it is cumulative, that the preservation of capital requirement applies upon distribution unless the terms of the plan dictate otherwise, such as a zero percent annual floor. Using actual ROR can cause high 401(a)(26) minimums when there are low or negative investment returns and can cause low 415 lump sum payout limits when there are high investment returns, so be careful out there!

The IRS just said it will be $11,250 for the super de duper catchup.