After-tax Contributions

i've been getting a lot of inquiries about after-tax contributions from clients.  

The question I have is this:

Do after-tax contributions have to treated as comp to comp as part of the ACP test or can you use new comp for the calculation?

For example, owner is 60, makes $200k and puts $20k after tax.  This is a 10% contribution.

Employee is 30, makes $50,000 and puts in zero.  The profit sharing contribution to employee is 10%(ish) or 3.5% (ish)?

Thoughts?

I think that's not how the ACP test works.

i was just using a rough example.. we don't have plans with after-tax so i'm intrested to see if anyone else offers and if they do how they handle for the ACP test.

After tax is tested under ACP and ACP only.  So in the example above, the ACP test fails completely.

Although salary deferrals (including Roth deferrals) are tested in the Average Benefits Test, I don't think voluntary after-tax contributions are part of the ABT.

I am not sure if they are taken into account to determine the allocation percentage to Key EEs for Top Heavy purposes like deferrals are.

It's been a LONG time since I've dealt with voluntary after tax contributions in a 401(k) plan other than legacy contributions that are being distributed.

2 hours ago, Ahuntingus said:

i was just using a rough example.. we don't have plans with after-tax so i'm intrested to see if anyone else offers and if they do how they handle for the ACP test.

In your example if those are the only 2 participants in the plan and there are no other contributions in the ACP test then HCE ACP = 10%, NHCE ACP = 0% and 2 x 0 = 0 so you would refund 100% of the after tax contributions plus earnings.

As to why you are getting a lot of questions, I think there was Wall Street Journal article about mega backdoor ROTH somewhat recently.

On 8/6/2021 at 2:18 PM, Lou S. said:

As to why you are getting a lot of questions, I think there was Wall Street Journal article about mega backdoor ROTH somewhat recently.

Exactly - and what I am telling everyone is that this only works for two types of plans: 1) HCE-only plans that do not need to test and 2) very large plans that can pass ACP testing with the VAT contributions. If your plan(s) is(are) in between, fuggetaboutit!

On 8/6/2021 at 2:18 PM, Lou S. said:

 

As to why you are getting a lot of questions, I think there was Wall Street Journal article about mega backdoor ROTH somewhat recently.

That same article is causing headaches for every TPA...

However, if you had a safe harbor match plan(that satisfies only the ADP), would the match then become part of the ACP, meaning the HCE's could theoretically do up to 6% after-tax?

I'm not sure I follow your question. If the NHCE ACP is 6% the HCE ACP could be 8%. And the HCE is probably also getting the match in addition to any VAT.

On 8/24/2021 at 4:43 PM, Lou S. said:

I'm not sure I follow your question. If the NHCE ACP is 6% the HCE ACP could be 8%. And the HCE is probably also getting the match in addition to any VAT.

Let me try to rephrase it then, if you had a top heavy 401(k) Plan with the SHMA as the only employer allocation (but which excluded HCE's and was only used to satisfy the ADP), would the SHMA then be included in the ACP test for the VAT?  Does the VAT then trigger a top heavy minimum allocation for any non-key not getting at least a 3% SHMA?  If the SHMA was also designated by the document to satisfy the ACP, do you still include it in the test with the VAT?

It is your discretion whether to use the SHM or not in the ACP test.

If VAT contributions are made, then the plan does not consist "solely" of deferrals and a safe harbor contribution.  Therefore, the plan is subject to top heavy rules.