Can you combine Roth 401(k) and Safe Harbor 401(k)?

[Guest mjn]

I have a client who wants to start a safe harbor 401(k) for 2006. Can he incorporate the Roth 401(k) feature in a safe harbor 401(k) plan? If so, could you still do a safe harbor match on Roth deferrals?

And has anyone heard anything about whether the IRS will issue a good faith amendment for the Roth 401(k)?

Thanks.

[Tom Poje]

my understanding would be yes.

A Roth deferral is still a deferral. It is almost like a special investment choice, one in which you pay taxes up front. therefore, under normal conditions it would be included in the ADP test. the safe harbor rules simply eliminate the need for the ADP test.

Interesting, if plan is not safe harbor, and plan fails, the gains on Roth would be taxed under the proposed regs. so unless they were the only deferrals for the year, I am not sure why the HCE would use these.

even more interesting, there is a provision that excess aggregate contributions are not includable in gross income to the extent it represents a distribution of designated roth contributions. I guess that implies you have shifted them from the ADP test to the ACP test. I am not sure how that could happen otherwise. so plan passes ADP, fails ACP. deferrals are shifted to the ACP test. Plan still fails, so Roth deferrals are returned??????

Another thing I find interesting, after tax contributions are used in the ACP test. But now, if designated as Roth they are used in the ADP. and the tax consequences, since no taxes eventually on the gains are a lot better.

[g8r]

I had trouble following Tom's analysis (maybe it's just too late).

I agree that Roth deferrals are treated just like any other deferral (it's just the tax treatment that differs).

And, no word from the IRS on whether they will issue a model or good-faith amendment.