After-tax contributions - how to contribute?

[Guest paytaxesforusa]

Do non-Roth non-deductible after-tax contributions to a 401(k) plan have to be made through salary reduction, or can the contribution be made by the employee from external funds or from already taxed money paid and taxed earlier in the year?

[Jim Chad]

FWIW I believe they have to be salary reduction.

[Guest paytaxesforusa]

FWIW I believe they have to be salary reduction.

Thanks. Is there any reference to substantiate this? I found this in an a paper of EBRI, but have a hard time interpreting the language.

Elective—tax-deferred employee contributions in the form of a salary reduction (administered by the employer on behalf of the employee).

Matching—employer contributions that match employee contributions

Voluntary—after-tax employee contributions not made through salary reduction.

[QDROphile]

If this is a personal question about your ability to contribute to a plan that covers you, the plan terms will state how after-tax contributions are made. If your question is more abstract, then consider that "salary reduction" in its most precise use refers to an arrangement in which compensation is reduced for income tax purposes in connection with a contribution, a so-called (gag) "pre-tax" contribution. Roth contributions messed up the meaning by defining the contributions as elective deferrals that do not reduce compensation.

[jpod]

Of course the plan document controls, but if the question is more abstract as QDRO states fwiw I have this vague recollection that in the old days of Thrift Plans you could write a check to the Plan at the end of the year to make your voluntary (i.e., after-tax) contributions. There are some old fossils in the form of IRS revenue rulings, most if not all pre-ERISA, that could provide an answer.

[Guest paytaxesforusa]

If this is a personal question about your ability to contribute to a plan that covers you, the plan terms will state how after-tax contributions are made. If your question is more abstract, then consider that "salary reduction" in its most precise use refers to an arrangement in which compensation is reduced for income tax purposes in connection with a contribution, a so-called (gag) "pre-tax" contribution. Roth contributions messed up the meaning by defining the contributions as elective deferrals that do not reduce compensation.

"...consider that 'salary reduction' in its most precise use refers to an arrangement in which compensation is reduced for income tax purposes..." -

agreed, but the language in the article that I quoted, "elective - ...in the form of salary reduction (administered by the employer on behalf of the employee)" vs. "Voluntary—after-tax employee contributions not made through salary reduction" made me believe they intended to use the term "salary reduction" to mean that the contribution, whether before of after tax, while elected and paid by the employee, is administered by the employer, and "reduces" the distributable salary check, and contrasting this to how an after-tax contribution might be handled (possibly independed from a salary payment).

Furthermore, I was not able to get more insight on the original question from reading some related code sections.

Lastly, I have a specific plan document in front me that raised the question that I originally posted, as the language in that document is not explicit either. It mentions that after-tax contributions are taxable in one place, but at another place it just says "An Owner-Employee may make After-Tax Contributions under the Plan,... which will be held in Participants' After-Tax Contribution Account." That does not make me any wiser as to my original question. I was therefore hoping to get more insight into the regulatory framework as to how after-tax contributions can be performed.

A somewhat related, but not identical follow-up question would be whether after-tax contributions can exceed the earned income (or W-2 income in case of a corporation) in a given year.

Hope someone can chime in. After-tax contributions seem to become popular these days, as they can be more easily converted to Roth subaccounts since the 2010 and 2012 legislation.

To avoid confusion over the term "reduction", i.e. whether it reduces tax or reduces a payment, I want to re-phrase my original question to: "Do non-Roth non-deductible after-tax contributions to a 401(k) plan have to be made in combination with, and as part of, a salary payment, or can the contribution be made by the employee from external funds or from already taxed money paid and taxed earlier in the year?"

[Belgarath]

Hmmm - I don't know the reference offhand that says that employee voluntary contributions can be made by means other than salary deferral, but they clearly can. Consider, for example, that employee contributions can be made to plans OTHER THAN 401(k) arrangements - money purchase, straight PS, DB, etc.

Beyond that, then as mentioned earlier, I think the document provisions must be considered. If the document doesn't specify a required method, then I'd feel very comfortable with the plan accepting a contribution made by means other than through payroll.

[chc93]

I thought that after-tax contributions are part of 415 annual additions (100% of comp limit).

[Guest paytaxesforusa]

I thought that after-tax contributions are part of 415 annual additions (100% of comp limit).

I think so too.

Regarding the after-tax contribution not through payroll, it would be nice to hear an affirmative example where this has been done or where the plan allows to do it. It would clearly make things easier if it could be done independent of payroll, in the case where an owner-employee wants to keep compensation low, has other payroll items like tax withholding and employment taxes, but wants to max out the 415 limits with voluntary after-tax contributions.

[ETA Consulting LLC]

I don't think there is. I researched this before and came to the conclusion, based previous research, that after-tax contributions may be funded by a participant merely writing a check to the plan. I arrived at this conclusion through the establishing the default as "what you may do until the rules state you cannot".

I know this may should aggressive, but consider this. The 401(k) regulations actually took the time to state that you may not defer from Compensation that you have already received. Since that rule is actually written in law, then you'd look for that similar language in the 401(m) rules pertaining to voluntary after-tax contributions. It's simply not there.

So, there appears to be nothing in the regulations to preclude you from making after-tax voluntary contributions to the plan by merely writing a check from your checking account. HOWEVER, if the plan's language is written in a way to suggest that you cannot, then I would yield to the plan's language. As we know, most plans are written to specify that deferrals cannot be funded in this manner; I'm not sure what they say regarding after-tax.

Good Luck!

[John Feldt ERPA CPC QPA]

After-tax voluntary employee contribuitions are aggregated with the other employer contributions and elective deferrals (but not catchup deferrals) for being limited by the 415 limit.

[ETA Consulting LLC]

True. I think the question was whether or not a participant could actually fund after-tax by writing a personal check to the plan. Or, must it be withheld from payroll. My contention is that a participant may, in deed, write a personal check to the plan for purposes of funding voluntary after-tax. The rule that states that you may not defer from Compensation that has already been received applies to 401(k) deferrals only. There isn't an identical rule for after-tax.

So, in the obvious absence of any regulations precluding it, and the absence of any plan document language precluding it, you the plan should be fine accepting personal checks from participants for purposes of funding after-tax employee contributions. Of course, you'd want to have administrative procedures to that extent that applies uniformly to all participants.

Good Luck!

[shERPA]

I agree after-tax voluntary contributions may be made by the participant writing a check to the plan, absent any plan provision to the contrary.

Does a participant get any sort of extended time period after the end of the year to make after-tax voluntary contributions?

An employer contribution may be accrued at year end and deposited by the employer's tax return due date. An individual may make prior year IRA contributions until the following April 15. But there is specific authority in the code for this. I haven't found any authority for an extended period of time for voluntary contributions.

[austin3515]

No one has mentioned the ACP Test yet. In my experience, after-tax is generally DOA in a qualified plan because a) you should obviously max out Roth before doing after-tax, and b) most NHCE's will never do that. So now you have HCE's who presumably have already maxed out their Roth who wish to contribute even more on an after-tax basis. But that will never pass the ACP test.

[Belgarath]

In general, I agree that it will fail ACP. But there are plans with no HC (certain non-profits, for example) or plans ONLY with HC, such as only family, or sole props, whatever. So it can work in very limited situations. Problem is that most of the "buzz" out there neglects to mention the ACP problem.