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Voluntary After Tax vs Roth for low earners & can they be corrected to Roth?


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Posted

For some reason, a plan has allowed a lower paid participant to contribute Voluntary After Tax instead of as Roth 401(k).  Annual contributions are around $1,000.

I can't seem to think of a reason why this would be better for the participant.

Aside from that, Voluntary After Tax Contributions are not even in the Plan Document, so I'm wondering if it's an oversight and they can be reclassified at the recordkeeper as Roth Contributions.

Posted

One issue I see is that Roth deferrals are withheld from pay. Is the employer planning on reporting Roth deferrals on the participant's W-2? And does the plan have a deferral election form on file for Roth from the participant? Would they plan on getting one? 

I often see voluntary after tax as a direct contribution from the participant, not processed as a deferral. Is that what occurred here?

Is the person in question non-highly compensated? Lower paid does not always equal non-HCE. 

Without knowing more about the situation, I would hesitant to suggest reclassification to Roth deferrals as a solution. 

I'm a stranger on the internet. Nothing I write is tax or legal advice. 

I'd like a witty saying here, but I don't have any. When in doubt, what does the plan document say?

Posted

I'd imagine neither the HR person or employee knows what after-tax even is, or the difference between Roth and after-tax. This seems like an error on the part of the HR to contribute to the right account. Since this isn't even a contribution option in the plan document. 

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