Do Guideline plans allow for voluntary after-tax contributions in order to permit “back door” Roth rollovers?

Although Guideline 401(k) plans allow participants to make after-tax Roth contributions, in addition to traditional pre-tax contributions, we have chosen not to support voluntary after-tax contributions at this time.   

While 401(k) plans are sometimes designed to include voluntary after-tax contributions to allow participants to make “Back Door” Roth rollover contributions above the deferral limitation on Roth 401(k) contributions (for 2020, $19,500 + $6,500 “Catch-Up” for participants that attained age 50), this can have negative ramifications to the tax-qualified status of the plan itself. (1)  

One of the most important implications is that it would cause a “safe harbor” 401(k) plan to lose its exemption on ACP and Top Heavy testing. Additionally, since highly compensated employees are most likely to make voluntary after-tax contributions compared to the other employees, plans (whether designed to be safe harbor or not), tend to be at serious risk of failing the ACP and Top Heavy tests.

 

(1) This information is for general education purposes only and not intended to be tax advice. You are advised to consult a qualified tax professional before relying on the information provided herein.

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