Adding an After Tax Plan

[Guest klg]

I am evaluating the possibility of adding an after tax savings plan to our existing 401k for our hourly employees. Would appreciate hearing from anyone who can share his/her experience. Thanks.

[JanetM]

For many individuals this is the best way to save. We are manufacturing entity - many of our employees make $7 to $9 dollars. Of this group we have head of household filers who receive earned income credit. This group pays low or no taxes to begin with and don't benefit from tax deferred savings.

We allow withdrawal of After tax amounts at any time - subject to minimum of $500. This in effect makes for short term savings account for many folks.

While this is not what the plan was designed for - at least they are saving and it is hoped with more education they will look at plan as long term vehicle for savings rather than short term.

[Tom Poje]

The only precaution is the ACP test - since after tax $ must be tested.

Are HCEs going to take advantage of it?

Is there an hours requirement or last day for match? If so, those people who have not been included in the test will now show up with 0, and this could cause the test to fail.

If the plan has always passed testing without a problem, it is probably not an issue, but it should be considered

[david rigby]

Tom is correct about the ACP test. However, it is not the only issue to consider.

- For example, consider the process of communicatng this feature, both the first time and ongoing.

- Will the addition of such feature cause confusion among employees as to which money is which?

- What about withdrawals while employed?

- Will the existing plan find less favor?

[Tom Poje]

I hadn't thought about it because it is still in the future (2 1/2 years from now), but begining in 2006 you will be able to add a Roth IRA feature to the plan which would avoid the testing issues, etc. involved in after tax contributions, so I guess keep that in mind. Amazing how time flies.