Voluntary contribution if none by NHCE

[Guest JCD]

A small plan with 8 participants (3 HCEs and 5 NHCEs) allows after-tax contributions for all participants. The plan is not a 401(k) plan. Two HCEs wanted to make 10% after-tax contributions for PYE 10/31/02. The Employer is making a 15% PS contribution.

We believe that, as long as the NHCEs make no after-tax contribution, then the HCEs cannot make any after-tax contribution because, under 401(m), the lesser of 200% or 2+ percentage points is 0% (200% x 0% = 0%). Even if the NHCE made a nominal after-tax contribution, we don't think it would help much; e.g., NHCE average is 0.1%, then the most the HCE average could be is 0.2%. (The 125% test is even less than the 200%/2+ test.)

Could someone please confirm this understanding?

[Tom Poje]

you are correct, after tax contributions do not work if the only ones who make them are HCEs.

[four01kman]

You can make this work by having 3% of the profit sharing contributions immediately vest. Then you will satisfy the "safe harbor" rules under 401k/m.