Highly comp only putting after tax money, testing required?

[Guest Kim S.]

The highly compensated in this plan only puts in after tax money, I've been told that no adp/acp testing has to be done. Is that right? Based on the ACP test the highly compensated have refunds coming.

[MWeddell]

Sure, if the plan permits after-tax contributions and one or more highly compensated employees make after-tax employee contributions, then 401(m) testing is required. Nothing in your post indicates why this shouldn't be the conclusion.

[Guest Kim S.]

WHen I took this particular plan to my boss and said we have a huge excess on the acp test because of the after tax dollars being contributed. He said no testing has to be done on this plan because the highly comp's don't contribute pre tax money. I have never heard that so I wanted to clarify the answer. Thanks

[MGB]

Your boss is waaaaaay off the mark on what the rules are.

[RCK]

I agree with the other posts-- you have to do 401(m) testing.

In fact, most plans that I've been involved with have eliminated post-tax contributions or limited them to non-HCE's, just because it is so difficult to pass the test without restrictions.

[Guest Kim S.]

I was afraid of that answer. Thanks for the info. The test fails terribly!!! My boss specifically told them put in after tax money and NO testing has to be done then. Might be losing a client.

[Fredman]

Retain the client....loose the boss.

[Archimage]

If it helps, Treas Reg 401(m)(1) states....

"A defined contribution plan shall be treated as meeting the requirements of subsection (a)(4) with respect to the amount of any matching contribution or employee contribution..."

The employee contribution piece is your after-tax piece. Your boss can't argue with the regs. Then again, if he didn't already know this then I guess he could find some wrong explanation to support his ineptitude.

[Guest Harry O]

All should not be lost. If NHCEs are contributing on a pre-tax basis and HCEs on an after-tax basis, run the ACP test by recharacterizing the NHCE pre-tax contributions as after-tax contributions. This is permitted by the regs and should reduce or possibly eliminate your problem.