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Message Boards Digest

July 28, 2023

Here are the most recently added topics on the BenefitsLink® Message Boards:

EBECatty created a topic in 401(k) Plans

ACP Safe Harbor and After-Tax Employee Contributions

"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 Section 1.401(m)-2. See Section 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."

2 replies so far   |    Click Here to Add a Reply

Santo Gold created a topic in Distributions and Loans, Other than QDROs

Consequences of Deemed 401(k) Loans

"This may be loan administration 101 but I am not clear on what happens when a participant stops making loan repayments, mostly centered on what happens after a loan is deemed to have been distributed. Example: A participant has $100,000 account balance and takes a loan for $20,000. She repays $5,000 but then stops payments. The loan goes into default and triggers a deemed distribution. The participant is still employed. The outstanding balance (lets say that is $16,000) is taxable in the year of the deemed distribution. But there is accrued interest of $2,000 remaining on the loan at the time of default. I keep reading that the deemed distribution amount plus accrued interest must still be accounted for after the deemed distribution. But when a distributable event does occur, the accrued interest is used to offset the participant's non-loan account balance. Is that correct? So if a few years after the deemed distribution, the participant terminates and now has $200,000 non-loan account balance. She also has an additional $2,000 in accrued interest from the loan. Is it the case that the participant is paid $198,000?"

1 reply so far   |    Click Here to Add a Reply

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