Allocation of 401k/Roth EE contributions when annual IRS limit is reached

[Linda Adams]

Are there any regulations regarding the allocation of EE 401k (pretax) and 401k Roth ( after tax) contributions on the paycheck that an employee reaches their annual IRS limit of $18K or $24K if catchup qualifies?

If the EE is contributing to both pretax and post tax 401k plans and maxes out ....is there an obligation to apply all employee elected contributions for that pay period to the pretax 401k plan first? By obligation, I am referring to legal requirements by the IRS or any other institution?

I would assume that whatever 401k EE election % was used would be applied in this situation and it is possible that a person reaches the annual combined 401k/Roth 401k limit of $18K w/out all EE contributions being applied to the pretax 401k limit first.

Is there a standard methodology for applying pretax 401k and after tax Roth EE contributions as they reach the annual IRS limits?

 

Thank you,

Linda A

 

 

[ETA Consulting LLC]

The Regs do not get that specific.  This appears to be an administrative issue that may be addressed in the plan where you have a participant that made an election per the plan's provisions and encountered a point where clarification on that election is needed from the participant. 

Good Luck!

[Tom Poje]

I wouldn't think it makes a difference.

I would add the following (just in case the plan fails the ADP test):

When correcting an ADP test failure, a plan may permit a highly

compensated employee who has made both Roth contributions

and pre-tax elective deferrals in the applicable year to choose

whether the distribution of excess contributions will consist of

Roth contributions or pre-tax deferrals.

 Roth 401(k) contributions that are distributed as corrective

distributions are not qualified distributions. Roth contributions

(basis) will not be taxable to the participant, but earnings

associated with the distribution will be.

http://www.maddinhauser.com/uploads/14thAnnualTaxSymposium-EvolutionoftheRoth401k-gmr.pdf

[Linda Adams]

Thank you all for your responses. I appreciate your feedback;)

 

Linda A.