pone55

Spiritrider is referring to the off-the-shelf "Solo 401K" products. Vanguard, Ameritrade, and E*Trade all offer Solo 401K plans that include Roth 401K, but when contacted Ameritrade and E*Trade deny including any provision in their standard plan for an after-tax contribution beyond Roth 401K. What due diligence I have done so far agrees exactly with Spiritrider's last summary "If you want a one-participant/small business plan with after-tax contributions you are going to need a TPA." If you know of a specific broker whose standard Solo 401K plan language includes a provision for after-tax contributions - either by default or as an option - please post the name of that broker and the name of the contact you spoke to there. You might know of some hybrid product being offered by a specific broker that is not well-advertised.

That's a great point about existing custodians for solo 401K plans not supporting the after-tax provision. Thanks for stating that. No one ever said anything about the sponsor administering their own plan. If you have names of administrators you like and think are well suited to such a trivial plan, I would love to get referrals.

A solo 401K with assets under $250K has no requirement for filing a form 5500 and also has no stress test requirement. So I assume the objective is increased simplicity and reduced cost to manage a trivial plan structure.

As a hypothetical, a small company with two participants in a 401K has one employee leave the plan, thus leaving the plan with a single employee. Assuming this small business wants to move forward with no employees, is there any path for converting the existing 401K into a Solo 401K? At first glance, you might think that the new Solo plan could be created (and that might be done at an online brokerage due to simplicity), and then the assets could be transferred from the old plan to new plan, and then at that point the old plan could be terminated. The problem is there are regulations that forbid you from opening a new 401K within 12 months of closing the old one. That seems to suggest that the only safe paths would be to do some kind of in-place conversion of the existing plan, but is there even an allowed process for that? Another solution might be to rollover the plan assets to IRAs, then sit on your hands for 12 months and open up a new 401K. What's the best solution here, keeping in mind that a small firm with under $250K in assets in a plan probably is not going to hire an ERISA lawyer for $20K to break new ground in interpreting seldomly-used corners of regulations.

What is the basis in law for requiring an ACP test for after-tax contributions, when the plan is a Safe Harbor plan? There is a lot of confusion on this issue in the discussion online. Many administrators are saying that the 2014 / 2015 IRS rulings that made it possible to rollover after-tax contributions to a Roth IRA talked specifically about plans with the ACP tests. But supposedly those rulings did nothing to specifically prohibit plans with Safe Harbor doing the same thing. The online discussion makes it sound like a Safe Harbor plan might be able to do these after-tax contributions without ACP testing, but could run a risk that the IRS rules in some unpredictable way about that. If the law is clear and explicit that Safe Harbor cannot be used in combination with an after-tax plan provision, where is that in print and how unambiguous is the language there about Safe Harbor? Changing subject, in your example there is $60K in total contributions. I thought - even with the catchup employee contribution of $24K - that the total contribution limit was $53K? How is the limit being expanded by $7K in your example?

So let's use some specific examples. 1) If the after-tax contribution is made for $10K, and five years later that is still $10K and you convert that into a Rollover Roth IRA, you owe no tax, and earnings moving forward from that point compound tax-free. 2) If the after-tax contribution is made for $10K, and five years later the after-tax contribution is worth $20K, you can convert that $20K into a Rollover Roth IRA. But you owe ordinary income tax on $10K of earnings for the period the after-tax contribution stayed in the 401K. So putting these together, what would be most desirable would be an additional provision that allows non-hardship withdrawals or transfers while you remain employed by the company. That way you could rollover after-tax contributions into a Roth IRA in the same year you make the contribution (or the year after), before the contribution has taxable earnings. Even if this were allowed, however, many plans require any distributions to be pro-rata from all of the different 401K components: pre-tax, Roth 401K, and after-tax. Is there any reason the after-tax contributions could not be done in a single-employee 401K? The brokers that support plans for single-employee 401K generally segregate each type of 401K money into a separate account type, and they allow transfers to IRAs from each of the components individually.

First thanks for your entire reply and those facts. The section I quoted above makes me think there is something I don't understand about the feature I am asking about. A Roth 401K is taxed prior to going into the 401K, but it is not taxed going out. Your reply raises the possibility that after-tax contributions to the 401K are taxed both going in and coming out. Did you mean it that way? If yes, then that is of course why I see articles describing techniques to tax after-tax money out of the 401K and convert it into a Roth IRA, where of course the money would not be taxed coming out.

I guess the reason so many plans adopt a Safe Harbor provision is so they do not have to worry about ADP and ACP testing. Or are you saying that if you have an after-tax provision that you are no longer eligible for Safe Harbor, and the plan would be forced to go through ADP/ACP testing? In the ADP/ACP testing, are they looking at total contributions - including after-tax contributions - of the HCEs into the plan? The percentages used in the ADP/ACP testing aren't the pre-tax and Roth 401K contributions that add up to $18K/$24K, but include any additional amounts that go into the after-tax contribution pool? That said, why would any company not want to advertise such an after-tax feature to all employees of every rank? Contribution by the employee of after-tax money, in excess of the Roth 401K contribution of $18K/$24K, is not going to be taking any company matching money. So what possible economic incentive would any plan have to discriminate against any employee who wants to use that option? I'm imagining that such a provision might be extremely desirable for some low-income employees. For example, someone who is married and makes $60K / year may have a spouse whose income alone provides living expenses. The person making $60K/year might want to stick every available dollar into an after-tax retirement pool. It's hard to see why any company would discourage that. P.S., Would a single-employee 401K plan be eligible to adopt the after-tax provisions?

I am looking for information on the applicable rules. If there are in fact specific constraints or rules that make such arrangements unusual, or not valuable, then of course that is part of getting an understanding of those provisions. I am not looking for blueprints.

I have read online that 401K plans can adopt provisions to enable after-tax contributions *beyond* the $18K/$24K limits of contribution into a Roth 401K. Such a provision would enable an employee to contribute the amount to bring the total 401K annual contribution up to $53K/year. Can anyone refer me to pages that describe these plan provisions in more detail?