ACP Safe Harbor and After-Tax Employee Contributions

[EBECatty]

A 401(k) plan has a safe harbor match that satisfies both the ADP and ACP safe harbors. They are looking at adding after-tax employee contributions to accommodate backdoor Roth. 

1.401(m)-3(j)(6) says:

(6) Plan must satisfy ACP with respect to employee contributions. If the plan provides for employee contributions, in addition to satisfying the requirements of this section, it must also satisfy the ACP test of § 1.401(m)–2. See § 1.401(m)–2(a)(5)(iv) for special rules under which the ACP test is permitted to be performed disregarding some or all matching when this section is satisfied with respect to the matching contributions.

1.401(m)-2(a)(5)(iv) says, in part:

(iv) Matching contributions taken into account under safe harbor provisions. A plan that satisfies the ACP safe harbor requirements of section 401(m)(11) or 401(m)(12) for a plan year but nonetheless must satisfy the requirements of this section because it provides for employee contributions for such plan year is permitted to apply this section disregarding all matching contributions with respect to all eligible employees.

Is it correct that, if an HCE makes after-tax contributions, the only two options are:

• Rely on the ACP safe harbor for the matching contributions only (and avoid testing the match entirely) but then run the ACP test on after-tax contributions only (in which case ACP would likely fail); or
• Include the match amounts in the ACP test (in which case ACP has a good chance of passing) but then would have to run the full ACP test, including matching contributions, thereby losing the safe harbor as to the match component (even if the match would have met the ACP safe harbor on its own).

In other words, it seems like if they want to include the match amounts in the after-tax ACP test, they would have to run ACP on the match too. 

[Lou S.]

Yes. That's seems like their options.

[CuseFan]

Agreed - ACP test the VAT alone or ACP test the match/VAT together.