Looking for advice- 401(k) plan with several employees having post-tax balance...

[Guest jhilliard]

We have a client with a 401(k) PS plan. The plan originally years ago had a post-tax provision. The plan has changed providers several times over the years and the post-tax information has been lost. The current record keeper has their post-tax balance but has no idea what was contributed at any time to this source.

My question is.... has anyone ever run into this situation, and if so how did you handle it.

I know from my past conversion experience, if the prior provider was unable to supply certain data the client signed a letter stating they were responsible to supply said data at the time it was needed. Obviously this is not the case here.

Any help would be great.

Thanks

[austin3515]

Maybe I'm naive (and I;m certain I am), but who cares?

The most important thing is that you know what the post-tax balance is today, and if I understand you correctly, you know that. So in the event of distributions, they will be taxed appropriately?

What am I missing???

[WDIK]

What am I missing???

The distinction between the basis (which was already taxed) and the earnings (which are subject to tax upon distribution).

Edit: To be fair jhilliard does say he knows the "post-tax balance", but I assume that he means the total value of those contributions plus the earnings, otherwise the question would not make sense.

[austin3515]

Oh!

How is this tracked in the first place. I've never seen an after-tax bucket and an after-tax earnings bucket. Should there be? Or is that usually maintained in a "back-end memory bank" on a server somewhere??

At least I was right about one thing! (that being that I am naive!)

[Harwood]

When these several employees eventually receive a 1099-R - check this box: "Box 2b—Taxable Amount not Determined Enter an “X” in this box only if you are unable to reasonably obtain the data needed to compute the taxable amount. If you mark this box, leave box 2a blank unless you are reporting a traditional IRA, SEP IRA, or SIMPLE IRA distribution. Except for IRAs, make every effort to compute the taxable amount."

Participant, sadly, is responsible for determining the basis that is non-taxable.

[ljr]

To answer Austin, there is a single bucket for after tax. The recordkeeping system will track the contributions received which is the basis recovered tax free upon distribution. The recordkeeping experts can tell you more. It usually isn't shown but is definitely stored. Some plans do include basis on participant statements but most do not, often due to lacking good information and deciding to put off the problem until distribution time. The catch is old plans where this information was not input from provider to provider. The last post sadly is correct that the participant ends up with the problem.

[FundeK]

I know that in the past, it has been very effective to explain to the participant that they will be taxed on the ENTIRE amount unless they come up with something showing what the basis is. This usually works when the after-tax balance is rather large. I have seen the participant find prior statements (some dating back many years) and I have also seen the company find "missing files" when the participant put serious pressure on the Plan Sponsor.

I would say that the company needs to show they did their due diligence and can not locate the information. At that point, your only option is to issue the 1099-R as Harwood explained.

[Guest jhilliard]

Thanks for all the input.... The client is trying their best not to put the burden back on the employees as several of them are the owners or executives (there is a shock!).

I think this is a long shot but do post-tax deferrals show on the employees W-2?

Thanks again for your help!

[Harwood]

After-tax is not found on a W-2 unless the employer decided to use an optional memo field to report it to the employees.

However, year-end payroll registers/"master control" reports should have the grand total for each year. So, if the payroll records are still stored somewhere . . .