Volutary after tax contributions

[Earl]

1. Guy, age 55, makes a lot of money.
2. Guy has no employees.
3. Guy has a DB & DC Plans. Funding for max benefit so 2014 DB contribution is more than 25% of pay.
4. In DC Plan, guy makes full 2014 401k of $23,000.
5. In DC Plan, guy makes full 6% 2014 company contribution of $15,600 based upon W-2 of $260,000 or more.
6. Total DC Account Addition is $38,600.
7. 415 Limit is $57,500 so he is $18,900 short of the maximum Account Addition.

Question:

Can the guy make a $18,900 “After-Tax Employee Voluntary Contribution” since ACP test is n/a? Is this contribution type part of the 402g limit? I think "no."

Idea is that he could immediately in-plan convert 100% of that money type to a Roth Account.

How do you make After-Tax Employee Voluntary Contribution? Do you just write a personal check to the plan? Is there a deadline (do you have to do by Dec 31/plan year end)?

Thanks

[Guest A_Dude]

http://benefitslink.com/boards/index.php?/topic/53429-rollover-voluntary-after-tax-to-roth/

[Guest A_Dude]

http://www.napa-net.org/news/technical-competence/case-of-the-week/case-of-the-week-converting-401k-plan-after-tax-accounts-to-roth-iras/

If you can do it to a Roth IRA, why not a Roth account in a 401(k) plan. The contributions would come through payroll, much like a roth deferral.

[Earl]

Ability to convert once in the plan is not the question, but thanks.

The question is would there be any limit on the vol EE contribution?

Could someone with no employees and $52,000 of wages make a $52,000 after-tax contribution and immediately convert it, effectively making a $52,000 Roth contribution for 2014. (Plus make a $5,500 catch up, for a total Roth "addition" of $57,500 for 2014.)

Seems like 415 is the only limit to be concerned with.

Where do you see that voluntary EE contributions must be payroll withholding? I don't see that anywhere.

(Problem is I can't find much of anything on them anywhere. But this seems like a pretty good opportunity for someone outlined at the top.)

[Lou S.]

Great question. We never use after tax contributions in plans but if what the OP describes is possible we sure might start in 1 man DB/DC combo plans.

[Earl]

I know, right? Sounds too good to be true but I can't find a problem with it yet.

[shERPA]

I think the concept works. Tried to get traction on the idea with CPAs last year but it really didn't get much interest. But I think the $18.9K and immediately convert to Roth is a great idea.

I was concerned about the conversion triggering a basis recovery ratio on the entire DC plan, but under IRC 72(d) it says that employee contributions in a DC plan may be treated as a separate contract.

I had a few plans in the early 80s with voluntary after tax contributions, I don't remember the mechanics of how they were actually made to the plan. I think the ee can write a check to the plan based on our documents at least which classify them as being made by the ee.

[FormsRstillmylife]

I have some ancient notes as to why our volume submitter document limits nondeductible employee contributions to 10% of compensation.

10% limit on voluntary nondeductible employee contributions

Regulation section 1.219(a)-5©(1)(ii) as proposed 1/23/1984

© Rules for plans accepting qualified voluntary employee contributions

(1) Plan provision, etc

(ii) If the plan document provides for the acceptance of voluntary contributions, but does not specifically provide for acceptance of qualified voluntary employee contributions, the plan qualification limitation on voluntary contributions (the limit of 10 percent of the employee's cumulative compensation less prior voluntary contributions) would apply to both qualified voluntary employee contributions and other voluntary contributions. On the other hand, if the plan document provides for acceptance of both qualified voluntary employee contributions and other voluntary contributions, the plan qualification limitation on voluntary contributions would apply only to the contributions other than the qualified voluntary employee contributions.

The proposed 415 regulations that will be effective 1/1/2007 refer to the 10% limitation in examples but do not actually state the rule. The status of this limitation is very unclear.

As reflected in Notice 82-13 and Notice 83-11, voluntary nondeductible employee contributions were subject to a 10% of compensation limitation. With the adoption of the ADP/ACP testing for elective deferral, voluntary nondeductible employee contributions, and matching contributions, the reference material ceases to refer to any other dollar or percentage limitation for these contributions. However, employee contributions continue to be an item included in annual additions under 415; therefore, before EGTRRA voluntary nondeductible employee contributions are subject to a 25% of compensation limitation. Since employer contributions to profit sharing plans before EGTRRA are limited to 15% of compensation, the CMS, Inc. volume submitter document retained the 10% of compensation limitation for voluntary nondeductible employee contributions in order to prevent these contributions from restricting employer deductible contributions.

I have not reviewed the impact of the EGTRRA 404 and 415 changes on our document restriction, nor have I reviewed the impact of the Roth employer plan provisions of EGTRRA on voluntary nondeductible employee contributions.

CB-NOTICE, PEN-RUL ¶17,099K, Notice 82-13, I.R.B. 1982-19, 16., Economic Recovery Tax Act

I-15. Q. Is the limitation on voluntary employee contributions to a qualified plan of 10 percent of an employee’s compensation reduced by the amount of DECs?

A. No. The 10-percent limitation applies to non-deductible contributions only, not to DECs. Therefore, a plan which provides for DECs may also provide for voluntary nondeductible employee contributions of up to 10 percent of compensation.

CB-NOTICE, PEN-RUL ¶17,099U, Notice 83-11, I.R.B. 1983-30, 22., Contributions and benefits: Limitations: Guidelines: TEFRA amendments.

Effective on January 1, 1986, and each January 1 thereafter, the $90,000 limitation above will be automatically adjusted to the new dollar limitation determined by the Commissioner of Internal Revenue for that calendar year. The new limitation will apply to Limitation Years ending within the calendar year of the adjustment.

Employee Contributions: If a participant makes nondeductible employee contributions under the terms of this plan, in no event may the lesser of (a) or (b) exceed the lesser of (i) $7,500, or (ii) 10 percent of the participant’s compensation for any Limitation Year. For purposes of the preceding sentence (a) is the amount of nondeductible employee contributions in excess of 6 percent of the participant’s compensation for any Limitation Year, and (b) is one-half of such employee contributions.

[masteff]

I have not reviewed the impact of the EGTRRA 404 and 415 changes on our document restriction, nor have I reviewed the impact of the Roth employer plan provisions of EGTRRA on voluntary nondeductible employee contributions.

While there may be some odd scenario that doesn't come to mind, generally speaking, post-EGTRRA limits on after-tax contributions come from either the annual additions limit or are plan defined. While EGTRRA allows a plan to permit 100% of comp to be contributed, many plans set a lower % to avoid messing up other payroll deductions. At my former employer, we did 50% pre-tax and/or after-tax combined. The plan had an annual match so that wasn't an issue but we did have to create a worksheet so people wouldn't over contribute after-tax money and cheat themselves out of said match. If anyone wants, they can send me a private message and I'll provide a link to the current SPD for that plan.

See also: http://www.bogleheads.org/wiki/After-tax_401(k)#After-Tax_401k_limits

[Guest A_Dude]

http://benefitslink.com/boards/index.php?/topic/40750-after-tax-contribution-limit/

It seems they conculded the only limit is 415. My reference to the use of payroll was becuase of the 415limit, but yes you could write a check. It looks like the new roth in-plan conversion rules just opened a nice doorway.

[Earl]

I just realized, I think, this applies to Single person 401ks also. Am I wrong here?

W-2 Wages $52,000

401k $23,000

PS $13,000

Vol Non-Ded EE Cont $16,000 (& convert to Roth)

$52,000 = 415 limit