Post-Tax contributions in a 401(k)

[Guest Jim Jesikiewicz]

Can anyone point me to an article that displays the advantages of having post-tax contributions in a failing 401(k) plan?

[Tom Poje]

Jim,

I do not know of an article, but if post-tax contributions are allowed, then deferrals may be re-characterized as after tax contributions. Therefore, if the plan fails the ADP test, the problem deferrals 'cease' to exist. and now the ADP test passes.

A big advantage. However, this is offset by the following-

since they are post tax contributions, they must be used in the ACP test. generally, that means you are only moving the problem from one test to another. In addition, if post-tax contributions are allowed, then you can no longer exclude anyone from the ACP test. E.g. if plan has a last day rule, then ees who termianted are not included in the ACP test. That eliminates a bunch of zeroes. Now however, you have to include these people because thay could have made an after tax contribution. Ugh, now you have a greater chance of failing the test.

In addition, since you have recharacterized the deferrals as after tax contributions, I believe you have to go back and issue a new W-2 to the individual.

All this sounds like to many disadvantages, rather than advantages.

[Brian Gallagher]

...and don't forget that the basic plan document must specifically allow for those deferrals to be recharacterized...if the doc doesn't mention it one way or the other, it's not allowed.