After-Tax Contributions/Mega Roth Conversion considerations

I know allowing after-tax contributions for intent of mega backdoor Roth conversions only tend to work for very large companies. Is there a minimum number of employees where this strategy generally starts to make more sense? 1,000 employees? 

We have a company that is around 800 employees that is considering adding an after-tax contribution source. They currently pass ACP testing easily using the top paid group election. The most recent ACP test had around 90 HCEs and 80 other employees who reached the 2022 income limit of $305k but are NHCEs because of the top paid group. 

If after-tax were to be added, I suppose it would depend on how many employees in each category actually used the source. If it were only a handful of the HCEs in the top 20% they'd be screwed. Are there any other considerations with respect to the demographics that should be considered? 

A couple of thoughts - how many of the HCE are presently maxing out on Roth Deferrals? 

Are there employer contributions (match, nonelective ) made each year? If so, are the HCE converting those amount each year? 
The employees that are already taking full advantage of the existing provisions are the ones likely to utilize the after-tax contribution --> roth conversion option. 

It has not passed, but there have been proposals around doing away with the ability to convert voluntary after-tax dollars to Roth dollars, so while I don't know the likelihood of any of those gaining traction, I wonder if if it worth adding the provision if folks think it might go away in a few years. 

FWIW - I often see these types of provisions in owner-only plans where ACP testing is a non-issue. So not only for large plans. 

And personal pet peeve: I hate the term "mega backdoor Roth conversion" I know you didn't make it up, so not directed at you. It's 100% a marketing term and just an in-plan Roth Conversion. 

I have a client in the financial services industry with around 200 employees.  They use the top paid group rules and HCEs are employees earning over around $370,000.  Most of the NHCEs earn over $150,000.  They use the after-tax feature to allow participants to reach the maximum annual deferral limit and make Roth conversions an option.

When they were considering adding the after-tax feature, there really was no way to estimate utilization of the feature based on available census data.  They provided employees with a detailed explanation of the how this feature would work and then polled the group to get a guestimate of utilization.  Based on the poll results, they modeled discrimination testing.  While the model passed, it was a a close call.  They moved forward with the change and within a few years utilization increased and testing is no longer close to failing. 

The point of telling this story is sometimes the pathway forward to a plan design change is to educate and then ask if people are interested.

On 5/17/2023 at 12:46 PM, justanotheradmin said:

A couple of thoughts - how many of the HCE are presently maxing out on Roth Deferrals? 

Are there employer contributions (match, nonelective ) made each year? If so, are the HCE converting those amount each year? 
The employees that are already taking full advantage of the existing provisions are the ones likely to utilize the after-tax contribution --> roth conversion option. 

There is an employer match of 50% of the first 10% of eligible comp (annual computation period w/true up). I'm not sure how many are maxing out Roth deferrals, but there are roughly 19% of NHCEs and 62% of HCEs that hit their 402(g) limit in 2022. 130 NHCEs and 60 HCEs.

Agreed on the "mega backdoor Roth." That's what the participants and sponsors call it so I've been conditioned.

21 hours ago, Paul I said:

I have a client in the financial services industry with around 200 employees.  They use the top paid group rules and HCEs are employees earning over around $370,000.  Most of the NHCEs earn over $150,000.  They use the after-tax feature to allow participants to reach the maximum annual deferral limit and make Roth conversions an option.

When they were considering adding the after-tax feature, there really was no way to estimate utilization of the feature based on available census data.  They provided employees with a detailed explanation of the how this feature would work and then polled the group to get a guestimate of utilization.  Based on the poll results, they modeled discrimination testing.  While the model passed, it was a a close call.  They moved forward with the change and within a few years utilization increased and testing is no longer close to failing. 

The point of telling this story is sometimes the pathway forward to a plan design change is to educate and then ask if people are interested.

Great insight, Paul. Much appreciated.