Safe harbor plan and employee after-tax contributions

[RPP2001]

A safe harbor plan wants to allow for employee after-tax contributions. The ADP safe harbor match is enhanced at 100% up to 6%. Also, the plan is top heavy. Two questions:

1. The plan must perform the ACP test with respect to the employee after-tax contributions only? Or, can you include the ADP safe harbor 100% up to 6% match in the ACP test along with the employee after-tax contributions?

2. Is the plan deemed top heavy exempt since the only employer contribution is the safe harbor match of 100% up to 6% or does the existence of employee after-tax contributions trigger the minimum top heavy allocation requirements?

The concern is that the only individuals expected to contribute the employee after-tax contributions are the key/HCEs.

Thank you.

[mphs77]

I would first want to be sure the "after tax contributions" the Employer wishes to allow are

not Roth 401(k) deferrals.....

[RPP2001]

Correct, they are the traditional employee after-tax contributions, not Roth 401(k) deferrals.

[John Feldt ERPA CPC QPA]

You can run an ACP test using all the match combined with the after-tax, or, you can ACP test just the matching that exceeds 4% of pay with all of the after-tax.

[RPP2001]

Thank you John. Also, I assume having after-tax contributions deposited in a safe harbor plan does not kick them out of top heavy minimum exempt status, correct?

[John Feldt ERPA CPC QPA]

Internal Revenue Code Section 416(g)(4)(H):

(H) Cash or deferred arrangements using alternative methods of meeting nondiscrimination requirements The term “top-heavy plan” shall not include a plan which consists solely of—

(i) a cash or deferred arrangement which meets the requirements of section 401(k)(12) or 401(k)(13), and

(ii) matching contributions with respect to which the requirements of section 401(m)(11) or 401(m)(12) are met.

Employee after-tax contributions do not meet any of sections 401(k)(12), 401(k)(13), 401(m)(11), or 401(m)(12). Therefore, if employee after-tax contributions have been made for the plan year, then the requirement to consist "solely of" contributions that meet these sections, as noted in the Code, has not been met and the plan is not exempt from top-heavy.

Meaning, an after-tax employee contribution appears to "kick them out of top heavy minimum exempt status".

See also Revenue Ruling 2004-13, although it has no after-tax examples.

https://www.irs.gov/irb/2004-07_IRB/ar11.html

[BG5150]

Can I hijack this and ask if Prevailing Wage contributions also trigger a THM if the plan is otherwise TH for a year?

[John Feldt ERPA CPC QPA]

Based on the requirements under IRC 416(g)(4)(H), I would conclude that the prevailing wage contributions would cause the plan to lose any top-heavy exemption it would otherwise normally have as a safe harbor plan.

However, suppose the plan is safe harbor using the 3% nonelective, and it provides that the prevailing wage contributions are contributed as QNECs that offset the safe harbor. And further assume that no one receives any prevailing wage contribution exceeding 3% of compensation. -- I have not looked into this, but perhaps there you could try to argue that you end up with a plan that consists solely of deferrals and safe harbor -- I am not sure about this argument however.

[BG5150]

In this case, we have a SH Match.

Everyone here seems to agree that TH is triggered.

[but just realized the sole Key EE made no deferrals for '15, thus no THM due in any case!]

[John Feldt ERPA CPC QPA]

Sometimes you just get lucky like that!

[thepensionmaven]

How would this apply with a SHNE 401k?