Voluntary Contributions

[thepensionmaven]

We have a safe harbor 401(k) with employee, SHNE and EE voluntary contributions.  Of course the owners are the only participants who did the voluntary contribution

ACP tests have been met; however, each owner seems to have over-shot the maximum $61K 415 limit.

I suppose that if the excess was contributed in 2019, all is OK; but what if not???

[justanotheradmin]

You'd have a 415 excess. Either the excess is moved to suspense and used toward something else, or if due to the EE contributions, a distribution would be processed. The question I would have is typically the employer contribution is reduced first, but if they were allocated SH, which they are guaranteed to receive, is the SH reduced? That seems counter-intuative. I don't know the answer, but I'm sure someone does. The Rev proc is clear that if the 415 excess is due to employee contributions ( including after-tax) then a distribution is processed. 

There are several examples in the revenue procedure, but here is basic part.

From Rev Proc 2019-19

"beginning before January 1, 2009, the permitted correction for failure to limit annual additions (other than elective deferrals and after-tax employee contributions) allocated to participants in a defined contribution plan as required in § 415 (even if the excess did not result from the allocation of forfeitures or from a reasonable error in estimating compensation) is to place the excess annual additions into an unallocated account, similar to the suspense account described in §1.415-6(b)(6)(iii) (as it appeared in the April 1, 2007 edition of 26 CFR part 1) prior to amendments made by the final regulations under § 415, to be used as an employer contribution, other than elective deferrals, in the succeeding year(s). While such amounts remain in the unallocated account, the Plan Sponsor is not permitted to make additional contributions to the plan. The permitted correction for failure to limit annual additions that are elective deferrals or after-tax employee contributions (even if the excess did not result from a reasonable error in determining compensation, the amount of elective deferrals or after-tax employee contributions that could be made with respect to an individual under the § 415 limits) is to distribute the elective deferrals or after-tax employee contributions using a method similar to that described under §1.415-6(b)(6)(iv) (as it appeared in the April 1, 2007 edition of 26 CFR part 1) prior to amendments made by the final regulations under § 415. Elective deferrals and after-tax employee contributions that are matched may be returned to the employee, provided that the matching contributions relating to such contributions are forfeited (which will also reduce excess annual additions for the affected individuals). The forfeited matching contributions are to be placed into an unallocated account to be used as an employer contribution, other than elective deferrals, in succeeding periods. For limitation years beginning on or after January 1, 2009, the failure to limit annual additions allocated to participants in a defined contribution plan as required in § 415 is corrected in accordance with section 6.06(2) and (4)."

[thepensionmaven]

What about allocating as an additional employer contribution, only for the NHCEs?

[ACK]

I am curious as to how you are passing ACP test if the owners are the only employees making voluntary contributions?  Maybe I am not thinking of something - just curious..

[thepensionmaven]

Three owners, only two made voluntary contriubtions.

[ACK]

So, just curious because I get asked about this occasionally.  In this scenario (no non-HCEs contributed), the HCEs are limited to 1.25%, correct?  

[justanotheradmin]

23 minutes ago, ACK said:

So, just curious because I get asked about this occasionally.  In this scenario (no non-HCEs contributed), the HCEs are limited to 1.25%, correct?  

Not quite.
In this scenario there are no NHCE in the test at all. The HCE ratio doesn't matter, it is deemed to pass if there are zero NHCE in the test. 
If there were NHCE in the test, but their % were 0, then yes, the HCE % would be limited. 

[Gilmore]

Are there 0 eligible NHCEs participating in the employee contribution portion of the plan, or are there 0 NHCEs eligible for the employee contribution portion of the plan?

[Gilmore]

Just wanted to follow up on ACK's original question because we too have run into similar situations in which an owner or other HCE wants to add ee voluntary contributions to the plan.

In the original post it is unclear I guess if there are any NHCEs eligible for the employee contribution portion of the plan. 

If there are eligible NHCEs, and none choose to participate, is it possible to pass the ACP test, assuming that they are not otherwise excludable, if any of the HCEs make ee contributions?

Thanks.

[justanotheradmin]

2 hours ago, Gilmore said:

If there are eligible NHCEs, and none choose to participate, is it possible to pass the ACP test, assuming that they are not otherwise excludable, if any of the HCEs make ee contributions?

It might be possible, if the HCE average is very low, low enough that compared to a 0% NHCE average the test passes. 

But that is rare, and in my opinion, unlikely. I would probably plan on the test failing and advising the client accordingly. 

Edit to clarify - this only works on first year where the NCHE rate was elected / deemed to be 3%. 

[thepensionmaven]

Three owners, only two contribute voluntary; 5 other HCEs, not contributing and 7 NHCEs not contributing.  Therefore ACP passed.

BTW, 6.06(4) speak of making the plan whole by replacement of the funds.  How does this apply to the above?

[justanotheradmin]

7 minutes ago, thepensionmaven said:

Three owners, only two contribute voluntary; 5 other HCEs, not contributing and 7 NHCEs not contributing.  Therefore ACP passed.

BTW, 6.06(4) speak of making the plan whole by replacement of the funds.  How does this apply to the above?

What was the HCE ACP average %?  
How do you have a NHCE ACP of 0% pass? 

[Gilmore]

So in a scenario where this is not the first plan year, and there are eligible NHCEs that are not otherwise excludable, and none of the NHCEs contribute, at what rate could any HCE contribute that would satisfy the ACP test?

[thepensionmaven]

The broker is telling me the "voluntary" contributions  could be Post Tax contributions to perform Roth IRA Conversions.

That being the case, there is no excess?  I have never dealt with Roth conversions, but the plan does allow.

[justanotheradmin]

Gilmore - I don't think there is one. 

thepensionmaven - after-tax voluntary contributions only have their basis post-tax. The earnings on it are subject to taxation when distributed. Usually if I have someone who has take the time to do an after-tax contribution, they know they immediately have to convert it to Roth (which results in zero additional income since the after-tax voluntary was already taxed), and then the money is considered Roth, and the earnings occur post-tax as well. 
If part of a 401(k) plan - they are not Roth IRA conversions, they are Roth conversions within the retirement plan. The participant makes an election (usually similar to filling out and signing a distribution form) requesting the conversion of plan money from non-Roth to Roth. 

Yes, there still might 415 excess, and an ACP failure. Those are completely separate from the conversion request. 
I'm still curious to know how the ACP passed with O% for NHCE, and X% for the HCE.  

[justanotheradmin]

Gilmore - might be the 1.25% that Ack suggests. My math says 0% times 125% is still zero, but perhaps the regulations accounted for that and clarified it somewhere. I haven't actually looked into it. If you find the reg or publication that says, please share. I'm sure it's covered in the ERISA outline book, or on ERISApedia. 

 

[Lou S.]

3 hours ago, justanotheradmin said:

What was the HCE ACP average %?  
How do you have a NHCE ACP of 0% pass? 

I was wondering the same thing.

And even if they somehow pass ACP, there is still the issue of 415 limits.

[Gilmore]

Would agree that 0 times 1.25% or 2% would still equal 0 for the the HCEs.  But you can check Ch 11, Section III, Part A of the EOB for a description of applying the 1.25 and 2x or 2 plus tests.

 

[C. B. Zeller]

18 hours ago, justanotheradmin said:

How do you have a NHCE ACP of 0% pass?

1.401(m)-2(a)(2)(i) specifies that the ACP is calculated to the nearest hundredth of a percent. So as long as the sum of the ACRs for the contributing HCEs (also calculated to the nearest hundredth of a percent) doesn't exceed .03%, you have .03% / 7 = .004286% which rounds to 0.00% and the ACP test passes!

[thepensionmaven]

Quoting Justanotheradmin from above,

"If part of a 401(k) plan - they are not Roth IRA conversions, they are Roth conversions within the retirement plan. The participant makes an election (usually similar to filling out and signing a distribution form) requesting the conversion of plan money from non-Roth to Roth. 

Yes, there still might 415 excess, and an ACP failure. Those are completely separate from the conversion request. "

Of course the client would not know, the broker, who is fairly knowledgeable (?) about these,  is saying the contributions were either voluntary, they paid the tax and then converted to Roth rollover.

They could possibly have rolled over some IRA $, paid tax on it and then converted to Roth; and coded incorrectly when submitted.

In which case, these would be rollovers and not contributions?

I am obviously a newbie, not having worked with in-plan conversions at all.

 

[C. B. Zeller]

6 minutes ago, thepensionmaven said:

Of course the client would not know

Didn't you say it was the owners who made the contribution in question? Why wouldn't they know where their own contributions came from?

6 minutes ago, thepensionmaven said:

They could possibly have rolled over some IRA $, paid tax on it and then converted to Roth; and coded incorrectly when submitted.

In which case, these would be rollovers and not contributions?

There should be documentation from the institution that distributed the assets in this case.

[justanotheradmin]

C.B. Zeller - clever on the rounding! :-)

thepensionmaven - Rollover versus Contributions, those are two very different things. that needs to be figured out and squared away before anything else ( ADP, 415 etc). 
As C.B. Zeller said - if they can show where the money came from it should be easier to determine if it was a rollover or an after-tax voluntary contribution. 

[thepensionmaven]

Seems to me contributions,  knowing this client. They would never think to roll IRA monen into the plan,  even if over 591/2.   If rollover I see your point,  this would not be at issue here. 

BTW,  20 participants,  3 owners,  5 HCE non owners not contributing,  balance NHCEs not contributing.   That is how ACP passed. 

[thepensionmaven]

OK, client has defined the excess to be from the voluntary contributions.  Since voluntary are after-tax, accountant sees no reason for them to be taxable.

ACP test met, knowing the voluntary made in 2018 will be pulled out shortly.

[justanotheradmin]

ACP test met, knowing the voluntary made in 2018 will be pulled out shortly.

 

7 hours ago, thepensionmaven said:

ACP test met, knowing the voluntary made in 2018 will be pulled out shortly.

Why is the money being pulled out? ACP refunds? 

Or are they trying to say it was a mistake and correct it by undoing the deposits? If the latter, I would be very very careful. The IRS mistake of fact rules are fairly narrow, and if it doesn't meet them, you may have a prohibited transaction on your hands, or at the very least a reversion subject to excise tax.