After Tax (not Roth) Contributions / ACP Test

[BeanCounterBlues]

I understand that after tax contributions have to be tested under ACP. In a small 401k plan w/ no testing problems but tight margins on ADP / ACP (safe harbor not an option for this client) - can anyone see any benefit to permitting after tax contributions? I have a situation where certain HCE(s) are interested in this feature but I believe it would create an automatic ACP failure (eg so what's the point of making the contribution).

I have not seen after tax deposits in practice before. The majority of what I come up w/ in trying to research the issue pertains to Roth (using the search term "after tax") which is not what I'm looking for. I would like to do some research, if anyone has any comments on the scenario or can point me to possible code / reg cites I would greatly appreciate.

Thank you in advance for any assistance.

[Bird]

so what's the point of making the contribution

I agree with you. "Back in the day" (before 1987, I think, and no I don't have much first-hand knowledge) participants were permitted to throw in a 6% after-tax contribution to plans that didn't otherwise permit employee contributions, and it didn't count against 415 or other limits - a freebie. They changed the law (in TRA 86, I'm pretty sure) to say that these counted just like any other contributions, and were to be tested under ACP as well, so anyone in their right mind stopped.

I think it's worthwhile to ask the HCEs why they think they would benefit and then you'll be able to dissuade them from this quaint notion that there's some benefit here. And don't forget to tell them about your extra fees for keeping track of this new source, and the pro-rata taxation when the money comes out.

[Tom Poje]

if the ACP test is already close, then the after tax feature also requires you include in testing those ees who might have been previously excluded (e.g. if the plan had a last day or hours requirement for match), thus adding more 0's to the test.

but the logic of it (instead of a Roth) baffles me.

lets see.

I put in $10000 in after tax. at retirement it has doubled to $20000.

I have to pay taxes on 10000 in earnings.

But with the Roth, I pay no taxes on the earnings.

hmmm. I am living in Florida and can probably get my hands on some swamp land if they want!

[BeanCounterBlues]

thank you much that's what I was looking for