Roth 401(K)s and 415 limits

[Guest bostonroscrea]

We are adding a roth 401(k) to our plan. When a partcipant hits 415 limits they automatically go on Non-qualified plan. I am trying to figure out how to design the plan if a participant hits 415 before 402g and the participant wishes to contribute the remaning 402g contributions to the roth 401(k). If it were the case that he wanted to just make 401(k) contributions, those contributions and the corresponding match would go to the NQ plan, but in the case of the roth, would these after tax nq contributions ?

Thanks for your help ?

[ERISAnut]

You are combining different principles when instead you should dissect them for meaning. In your fact pattern, I am going to assume the individual has a high compensation and therefore the $46,000 limit applies for 415. With that said, deferrals to the plan are typically made during the year while the employer contributions (for that year) are actually deposited in the following year. So, an individual may defer $15,500.

This amount may be broken down into pre-tax deferrals and Designated Roth Contributions in any percentage; but the total is limited to $15,500. This leaves $30,500 that may be contributed by the employer before reaching the 415 limit. Depending on the terms of the plan, the employer may curtail the additional contributions once the $46,000 limit is met; or continue to allocation (once again, depending on the terms of the plan). If the allocation per the terms of the plan exceeds the 415 limit, then you must correct using the correction method within the terms of the plan.

Hope this helps.

[Guest bostonroscrea]

You are combining different principles when instead you should dissect them for meaning. In your fact pattern, I am going to assume the individual has a high compensation and therefore the $46,000 limit applies for 415. With that said, deferrals to the plan are typically made during the year while the employer contributions (for that year) are actually deposited in the following year. So, an individual may defer $15,500.

This amount may be broken down into pre-tax deferrals and Designated Roth Contributions in any percentage; but the total is limited to $15,500. This leaves $30,500 that may be contributed by the employer before reaching the 415 limit. Depending on the terms of the plan, the employer may curtail the additional contributions once the $46,000 limit is met; or continue to allocation (once again, depending on the terms of the plan). If the allocation per the terms of the plan exceeds the 415 limit, then you must correct using the correction method within the terms of the plan.

Hope this helps.

Thanks very much for your reply.

I don't think I expalined the situation clearly.

Once a participants hits the 415 limit they enter the NQ plan. They can hit the 415 limit before or after hitting 402G. For example employer contributions may drive them through the 415 limit and they may just have contributed $13,000. In this situation they would continue to contribute up to $15,500, the extra $2,500 going into the NQ plan as a pre-tax deferral and the contributions (up to 6% of $230K) would be matched in the NQ plan. Now we are introducing a roth 401(k) plan. Say the scenario above exists but instead of pre-tax contributions the participant wants to contribute the additional $2,500 to his roth 401(k) since he is still under $15,500. Where could these contributions go ? NQ plan as after tax contributions ? Any suggestions would be greatly appreciated.

Regards,

Ger

[ERISAnut]

In your fact pattern, it is necessary for the employer to actually make contributions in excess of $30,500 to the participant's account (DURING) the plan year. Wow! Can happen, but very seldom does.

In such event, the plan (based merely on plan language) could curtail the participant's deferral since the 415 limit is reached, or may continue to allow the deferral and correct the 415 failure under the terms of the plan.

Regardless of the series of events (as there are hundreds of different scenarios possible) the language in the 401(k) plan will dictate exactly how these items are handled.

The confusion comes into play (as it always does) when the mention of a NQ plan is made as if the 401(k) plan is somehow governed by the NQ. A NQ may be governed making whatever references to the 401(k) the employer chooses, but the 401(k) will always operate pursuant to it's own provisions.

Hope this helps clarify a few things.

[Guest bostonroscrea]

In your fact pattern, it is necessary for the employer to actually make contributions in excess of $30,500 to the participant's account (DURING) the plan year. Wow! Can happen, but very seldom does.

In such event, the plan (based merely on plan language) could curtail the participant's deferral since the 415 limit is reached, or may continue to allow the deferral and correct the 415 failure under the terms of the plan.

Regardless of the series of events (as there are hundreds of different scenarios possible) the language in the 401(k) plan will dictate exactly how these items are handled.

The confusion comes into play (as it always does) when the mention of a NQ plan is made as if the 401(k) plan is somehow governed by the NQ. A NQ may be governed making whatever references to the 401(k) the employer chooses, but the 401(k) will always operate pursuant to it's own provisions.

Hope this helps clarify a few things.

Hi,

Thanks for your reply,

Yes the plan provides for employer contributions in excess of $30,500. I realise that the Q and NQ plans are totally separate. I am trying to design the plan so that we can accomodate these roth 401(k) contributions when 415 has already been exceeded but 402(g) has still not been reached. I realise it can no longer ne a roth 401(K) contribution to a nq plan, but maybe it can be an after tax contribution ?

Regards,

Ger

[ERISAnut]

Design the plan to begin forfeiting employer contributions in order to correct 415. The most reasonable thing to do in operation is to not allocate more than $30,500 in employer contributions DURING the year; or actually make the full $15,500 deferral in the first month of the year.

There is an entire fact pattern of events surrounding your case and what you are attempting to do, but the inconsistencies with the desired outcome and administrative feasibility is making your situation difficult. I would look to change the design, I would instead change the timing of the employer contributions.

Is this a one-person plan covering only the owner?

[K2retire]

Design the plan to begin forfeiting employer contributions in order to correct 415. The most reasonable thing to do in operation is to not allocate more than $30,500 in employer contributions DURING the year; or actually make the full $15,500 deferral in the first month of the year.

There is an entire fact pattern of events surrounding your case and what you are attempting to do, but the inconsistencies with the desired outcome and administrative feasibility is making your situation difficult. I would look to change the design, I would instead change the timing of the employer contributions.

Is this a one-person plan covering only the owner?

It is unlikely that an employee who was not the business owner would want to give up employer contributions to be able to make more salary deferrals, if they understood the concepts.