Reclassify After-tax as Roth

[mrslappywhite]

Anyone have a cite or guidance on the feasibility or legality of "reclassifying" After-tax contributions as Roth deferrals? A client who claims they weren't aware that their document does not allow After-tax to be matched is balking at forfeiting match excesses and has asked if they can reclassify the After-tax as Roth so the participants can keep their match. I want to tell them NO but I can't find anything either in support of this or opposed to it.

[Kevin C]

The definition of Roth deferrals is in 1.401(k)-1(f)(1).  Amounts originally contributed as employee after-tax contributions do not meet this definition. 
 

Quote

 

1.401(k)-1(f) Special rules for designated Roth contributions—(1) In general. The term designated Roth contribution means an elective contribution under a qualified cash or deferred arrangement that, to the extent permitted under the plan, is—

(i) Designated irrevocably by the employee at the time of the cash or deferred election as a designated Roth contribution that is being made in lieu of all or a portion of the pre-tax elective contributions the employee is otherwise eligible to make under the plan;

(ii) Treated by the employer as not excludible from the employee's gross income (in accordance with paragraph (f)(2) of this section);

(iii) Maintained by the plan in a separate account (in accordance with paragraph (f)(3) of this section).

 

It would be worth looking at 1.401(a)(4)-11(g) to see if a retroactive amendment to extend the match to after-tax contributions would be allowed. Depending on who made after-tax contributions, you might have a problem with the nondiscrimination requirements in -11(g)(3)(v).

[mrslappywhite]

Thank you! This is perfect. And client agreed to forfeit the excess after I told them all the issues with doing a reclassification if it were allowed (rerunning ADP/ACP, taxation issues, etc.)

[Luke Bailey]

If plan allows after-tax as well as Roth, the SPD should state clearly that there is no advantage to doing after-tax until Roth bucket full, except for, in most plans, easier distribution rules for after-tax.