Missed Roth deferral and QNEC is non-Roth

Hi!

My employer failed to correct the contributions to my 401k until after I left the company, so they paid a 50% QNEC.

However, I elected Roth and they paid pre-tax. This seems wrong to me since it's way less money ultimately going to me.

Can somebody verify?

(There's another thread suggesting an in-plan rollover, but that doesn't make sense since it's a taxable event and will immediately show how much less the pre-tax amount is compared to the same roth amount

Best,
Andrew

Andrew, 

I understand your concern that you did not get all the money in the 401k you were expecting.

However, the funds that were supposed to go into the plan you received as cash compensation.  In other words, you received the pay AND received a 50% QNEC.  Seems like a scenario I could live with.  If there was any missed match, you would have received 100% to the plan also.

You are correct that the QNEC is a Pre-Tax.  The Pre-Tax QNEC is per IRS code, so no choice in the matter.

I hope I have answered your questions.  If not, let us know.

Thanks

You can always roll the QNEC to an IRA and convert it to ROTH but as Mr. Bagwell points out you did get paid 150% of what you were going to get had they done it right in the first place so I'm not sure what the complaint is.

You do realize if they had done it as ROTH in the first place you would still owe the taxes on it now because that's how ROTH works right? You don't get a current year deduction for it, rather the goal is to take it out down the road as qualified ROTH withdrawal (after age 59 1/2 and at least 5 years after 1st contribution) so the earnings never get taxed.

Thanks guys, but don't hate the player, hate the game! I'm just trying to make sure I get what the IRS says I should get

Where does it say that a QNEC can't be Roth? I'm just going based on this page that says "The amount of the QNEC is equal to 50% of the employee's missed deferral" (https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-eligible-employees-werent-given-the-opportunity-to-make-an-elective-deferral-election-excluding-eligible-employees)

Yes, I'd have to pay Roth taxes now but a Roth lets you save more that'll grow tax free due to the limits (or in this case the QNEC amount) applying to the post-tax amount rather than the pre-tax amount.

Because it's an employer contribution, and all employer contributions are pre-tax. Roth is a specifically made at the election of the employee. You can choose to convert it to Roth (and pay the tax on it). 

Roth is §402A, completely different section of the tax code than employer contributions. There is no provision under 402A that allows for QNEC. 

1 hour ago, andrew said:

Thanks guys, but don't hate the player, hate the game! I'm just trying to make sure I get what the IRS says I should get

Where does it say that a QNEC can't be Roth? I'm just going based on this page that says "The amount of the QNEC is equal to 50% of the employee's missed deferral" (https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-eligible-employees-werent-given-the-opportunity-to-make-an-elective-deferral-election-excluding-eligible-employees)

Yes, I'd have to pay Roth taxes now but a Roth lets you save more that'll grow tax free due to the limits (or in this case the QNEC amount) applying to the post-tax amount rather than the pre-tax amount.

Hello - you are confused. Hopefully this helps:

Roth vs Pre-tax is a participant election for your deferrals out of your paycheck which impacts your taxes. You chose your preference and file your taxes accordingly.

As a completely separate conversation, employer money that goes into a 401(k) must be pre-tax.

Why?

401(k)s are "qualified" plans.

Qualified for what?

Favorable tax treatment in exchange for treating employees "equally" according to the rules.

How can you treat employees equally if you're mixing and matching employER roth contributions for some and pretax for others? When everyone has completely different unique tax situations? ?

You can't do it. Roth contributions would mean "paying someone's taxes" for them which even if possible to calculate, would be grossly unfair due to the higher tax bracket of HCEs. They would receive greater than their "fair share" from a tax savings standpoint vs a rank-in-file employee in a lower tax tier. Sounds like discrimination to me, ERISA's least favorite thing!

What is the answer IRS?

Let's just ban roth and require pre-tax for employer contributions. Problem solved.,

thanks for the answers! Definitely answered my question!

In terms of what the IRS should do though...definitely close the mega back door roth, and probably just detach retirement plans from employment entirely since people should be treated fairly inter-company, not just intra-company.