Pre 1986 After-tax contributions in P/S plan

[Biscuit13]

Prior to 1986, there was an after-tax contribution formula that allowed a participant to make a contribution over an above what he might receive in the way of a P/S. At the time, an ER could only contribute 15% of eligible payroll and didn't get the owner to the maximum annual contribution (also needed a MPPP to reach the maximum) so there was a provision where they could make an after-tax contribution. It somehow incorporated the annual addition and the ability to make a 6% contribution. Any help would be much appreciated. Steve

[Bird]

Is there a question in there?

[Biscuit13]

Bird,

Thank you for stating the obvious. Yes, I do have a question. Does anyone information or cites on how the after-tax contribution was calculated? Thanks

[hr for me]

Hopefully I can answer what I think you are asking. In all the plans I worked on that had an aftertax source, generally it was on the same type of participant chosen percentage of pretax plan compensation as any other contribution/deferral. For example purposes if a participant had pretax plan comp of $2000 in the pay period and wanted 4% to go pretax deferral that would be $80 deferred. If that same participant wanted 4% to go to aftertax contributions that would also be $80. So if there was only PS and aftertax, the participant would have made some choice each pay period as to how much to contribute. It is possible that election could have been a $ election rather than a %.

Except wasn't it Pre-87, Post-86? That is the law changed at the end of 1986 and now required any distribution out of aftertax sources to include a prorata portion of earnings because participants had been allowed to just take their contributions and leave the earnings in the plan and not have to pay tax on any of them. So any aftertax contributions in the plan that you say is "pre-86" would be allowed to be withdrawn without having to take out any of the earnings associated (and would decrease the basis left)

Every plan I worked on had information "buckets" that held a total basis of both Pre-87 and Post-86 contributions. Any contributions or withdrawals of aftertax affected those buckets.

eta: if I remember correctly it was added into annual additions and tested under ACP with the ER match.

[Doghouse]

Prior to 1987, only after-tax employee contributions exceeding the lesser of 6% of compensation or 1/2 the employee contributions were counted as annual additions. Many plans limited the after-tax contribution % to 6% for that reason. I'm showing my age .

[Bird]

The ones I saw, it was simply that they added 6% of their pay because that was the amount allowable that did not count against the annual addition. I think they could actually write a check and did not have to have the money withheld from their pay.

If you are trying to reconstruct the contributions for purposes of determining basis...good luck. The couple of times I had to do it, I had half-decent records and was able to come up with the actual total contributions, or at least a defensible estimate.

[Biscuit13]

Doghouse,

That was the formula I was looking for. I remembered there were two steps to if you wanted to maximize the voluntary contribution and do more than 6%.

Thanks "HR for me" for your input.

Bird, you are right it will not be an easy calculation but for my client that made those voluntary contributions for just a few years, he now has a balance of over $2.3m.

Thanks again !

Elkmont13