After Tax $ Source

[Guest JimJ]

What are some basic things to consider before an employer decides to add an after tax source to a plan? What would restrict HCE's to make after tax contributions. Would it make a difference if the plan was top heavy?

[Guest Una M]

The after tax money would have to be tested under ACP. My experience has been that after tax contributions are usually made by HCE's, especially those who max out on pre tax. This results in failure of the ACP and after tax excesses. IF the plan sponsor doesn't want to deal with excesses, then that could be one valid reason not to introduce it.

[david rigby]

The ACP test comes from IRC 401(m). This tests the sum of matching contributions and after-tax contributions. If you this test, how are you going to adjust to pass?

Reduce match (not a well-received option)?

Refund after-tax (then why do it in the first place)?

[Guest Harry O]

I would agree with Una M if the employer didn't maintain a NQ 401(k) plan. If you put in one of these plans, the HCEs will switch over to that plan after maxing out at $10,500 instead of putting in after-tax contributions.

I have also seen heavy utilization of after-tax contributions by low-paid, union or hourly workers. The reason is that 401(k) money is pretty much locked away until age 59.5 while after-tax money can generally be withdrawn at any time.

[Disco Stu]

One other thing to consider regarding the ACP test implications of putting in an after tax feature...

If you happen to have some extra room in the ADP side of the discrimination testing, you can slide that excess over to the ACP side of the equation. That might allow HCEs to make a little more in after-tax contributions than they otherwise would.