Correction for Failure to Effect Participant Election

[Guest BWNWE]

My employer's 401(k) Plan offers participants the opportunity to contribute to the Plan on a pre-tax, Roth after-tax and non-Roth after-tax basis.

During a HRIS system update at the start of year, one participants long standing non-Roth after-tax election was not carried over properly. The IRS provides guidance on "Correcting a Failure to Effect Employee Elective Deferrals". The guidance specifically states that the procedures do not apply to after-tax or catch-up contributions--which is kind of odd because catch-up contributions are elective deferrals but non-Roth after-tax are not considered, at least that I've seen, elective deferrals...but I digress.

The produre for correcting a failure to effect elective deferral elections is nearly identical to the procedure for correcting the improper exclusion of an eligible employee from a plan with the difference being that instead of using the ADP for the ee's group (NHCE or HCE), you use the actual election, because it's known, to determine the correction. The correction is the product of the eligible earnings multiplied by the deferral election multiplied by 50%. There is a similar correction for after-tax contributions for excluding an eligible EE--you you use 40% instead of 50%.

Based on all of this, can I assume, because the IRS does not provide guidance, that the corrective contribution for failing to effect after-tax elections is the same as the procedure for failing to effect elective deferrals (again, using 40% instead of 50%)? Or is the employer not on the hook for correcting the mistake except, possibly, for missed earnings?

Any help or a point in the right direction would be much appreciated.

[401king]

This may be off-topic, but why would a plan allow a participant to contribute on a non-Roth after-tax basis when Roth contributions are available?

[Guest BWNWE]

This may be off-topic, but why would a plan allow a participant to contribute on a non-Roth after-tax basis when Roth contributions are available?

Three reasons:

1. Legacy. The plan was only amended on 1/1/12 to allow participants to make contributions on a Roth basis. Prior to that the only contributions participants were allowed to make were pre-tax, catch-up and non-Roth after-tax. Eliminating the ability to make after-tax contributions was never a consideration.

2. Withdrawals. As you know, non-Roth after-tax contributions can be withdrawn from the plan at anytime. Any distribution of after-tax contributions is pro-rata participant contributions/earnings. The earnings portion can be rolled over to maintain tax deferred status and the contributions can be used at the participant's discretion. There are no five-year rules and so employee's can access the money without fear of adverse tax consequences with regard to proceeds attributable to their contributions (not earnings).

3. Participants whose earnings exceed the 401(a)(17) limit. As you know the section 415 limit on contributions from all sources in 2012 is $50,000. The 402(g) limit on elective deferrals (combined pre-tax and Roth) is $17,000. The company match is 100% up to 4%. Therefore, in the absence of non-Roth after-tax contributions, a the contributions on behalf of a participant whose earnings exceed the 401(a)(17) limit (without considering catch-up contributions not subject to 415 limits) would be $17,000 + ($250,000 x 4%) = $27,000. Such a participant may wish to contribute up to the 415 limit and, in the absence of after-tax contributions, he/she would come up $23,000 short of that limit.

We have participants, both highly compensated and non-highly compensated, who meet the 402(g) limit every year and do take advantage of the ability to contribute on an after-tax basis.