After-tax 401(k) contributions

[skunkfunk]

We had our yearly 401k meeting last week. The plan administrator told me that I can't put in after-tax dollars to take advantage of this.

Can they do that? Seems like a dumb bit of policy just to save them a little bit of paperwork.

[ZiziPB]

Yes, there is no requirement for a plan to allow it.  Some do, some don't.  You need to read your plan documents to find out if you plan allows after-tax contributions or not.  Look at the Summary Plan Description for your particular plan to see what the contribution limits are.

[CptCool]

Just a note to anyone else wondering about it as well: Make sure your plan allows for in-service withdrawal of your after-tax contributions as well. If not, then you're not going to be able to move it into a roth IRA

[Schaefer Light]

Unfortunately, my plan allows neither of the above.

[FIPurpose]

Just a note to anyone else wondering about it as well: Make sure your plan allows for in-service withdrawal of your after-tax contributions as well. If not, then you're not going to be able to move it into a roth IRA

Hmm I believe you'll still be able to move it. It will just have to wait till you have left that company.

[Mississippi Mudstache]

That sucks. I'm really glad my employer allows after-tax contributions. I started this job in October 2014, and by then I had already maxed out my pre-tax 401k at the old employer. So if I weren't allowed to contribute after-tax, I would have missed out on the company match for 3 months. That would have cost me $1000.

Frankly it's surprising that any plan wouldn't allow it. My new 401k provider essentially begs you to contribute any money that you can, so they can charge their stupid fees. I can't remember how many reminders I got telling me to roll over my old 401k into my new one, to make it "easier to manage". Um, no thanks. Average fund at new 401k (MassMutual) charges ~0.9% vs. 0.1% for my investments at the old 401k (Vanguard, of course).

[MrMoogle]

Frankly it's surprising that any plan wouldn't allow it. My new 401k provider essentially begs you to contribute any money that you can, so they can charge their stupid fees. I can't remember how many reminders I got telling me to roll over my old 401k into my new one, to make it "easier to manage". Um, no thanks. Average fund at new 401k (MassMutual) charges ~0.9% vs. 0.1% for my investments at the old 401k (Vanguard, of course).

Not a lot of people use it, so why go through more hassle to set it up?  I just learned about this method this year, but the IRS simplified the conversion just last year, so I'm expecting more people to get interested in it.  Although it is one of the "loopholes" Obama is proposing to close, so who knows how long it'll be around.

I saw on a poll on another site about 40% (of people with 401k's) had access to an after-tax 401k.

[maizefolk]

At a small business I am associated with, we were told that after-tax contributions create many more complications for anti-discrimination testing (making sure highly compensated employees aren't contributing substantially more to the plans than non-highly compensated). For pre-tax contributions companies can avoid the issue entirely by adopting a safe harbor plan with a minimum employer match (or minimum employer contribution) which allow anyone who wants to to contribute up to the $18,000/year max, while for post-tax contributions gaps of >2% of average salary deferral between highly compensated and non-highly compensated employees create problems for the plan.

Note that I'm passing on hear-say which I'm not entirely convinced is accurate, but it's the only explanation I've heard of so far beyond lack of interest for why the ability to make after tax contributions isn't more common among 401k plans.

[Schaefer Light]

At a small business I am associated with, we were told that after-tax contributions create many more complications for anti-discrimination testing (making sure highly compensated employees aren't contributing substantially more to the plans than non-highly compensated). For pre-tax contributions companies can avoid the issue entirely by adopting a safe harbor plan with a minimum employer match (or minimum employer contribution) which allow anyone who wants to to contribute up to the $18,000/year max, while for post-tax contributions gaps of >2% of average salary deferral between highly compensated and non-highly compensated employees create problems for the plan.

Note that I'm passing on hear-say which I'm not entirely convinced is accurate, but it's the only explanation I've heard of so far beyond lack of interest for why the ability to make after tax contributions isn't more common among 401k plans.

Why does it matter if highly compensated employees are contributing more than non-highly compensated employees?  Isn't it common sense that people who make more would have more to invest?  Not trying to start an argument here, but I just don't understand why businesses should have to worry about this kind of crap.

[ZiziPB]

At a small business I am associated with, we were told that after-tax contributions create many more complications for anti-discrimination testing (making sure highly compensated employees aren't contributing substantially more to the plans than non-highly compensated). For pre-tax contributions companies can avoid the issue entirely by adopting a safe harbor plan with a minimum employer match (or minimum employer contribution) which allow anyone who wants to to contribute up to the $18,000/year max, while for post-tax contributions gaps of >2% of average salary deferral between highly compensated and non-highly compensated employees create problems for the plan.

Note that I'm passing on hear-say which I'm not entirely convinced is accurate, but it's the only explanation I've heard of so far beyond lack of interest for why the ability to make after tax contributions isn't more common among 401k plans.

Why does it matter if highly compensated employees are contributing more than non-highly compensated employees?  Isn't it common sense that people who make more would have more to invest?  Not trying to start an argument here, but I just don't understand why businesses should have to worry about this kind of crap.

Unfortunately, this "kind of crap" is the law as the 401k plans are designed to be non-discriminatory. Basically, a plan that appears to clearly favor the HCEs (by having features that heavily weigh towards higher participation levels by HCEs) is viewed as discriminatory.

[frugalnacho]

At a small business I am associated with, we were told that after-tax contributions create many more complications for anti-discrimination testing (making sure highly compensated employees aren't contributing substantially more to the plans than non-highly compensated). For pre-tax contributions companies can avoid the issue entirely by adopting a safe harbor plan with a minimum employer match (or minimum employer contribution) which allow anyone who wants to to contribute up to the $18,000/year max, while for post-tax contributions gaps of >2% of average salary deferral between highly compensated and non-highly compensated employees create problems for the plan.

Note that I'm passing on hear-say which I'm not entirely convinced is accurate, but it's the only explanation I've heard of so far beyond lack of interest for why the ability to make after tax contributions isn't more common among 401k plans.

Why does it matter if highly compensated employees are contributing more than non-highly compensated employees?  Isn't it common sense that people who make more would have more to invest?  Not trying to start an argument here, but I just don't understand why businesses should have to worry about this kind of crap.

Because 401k anti discrimination is full blown retarded and you can be limited in how much you can contribute based on what other people in the same company contribute.  It doesn't make any fucking sense to me.  There have been multiple threads about it.

[seattlecyclone]

I think the non-discrimination testing makes sense. These rules give the executives an incentive to make sure their employees earn enough to save for retirement, which is a good thing for everyone.

[frugalnacho]

I think the non-discrimination testing makes sense. These rules give the executives an incentive to make sure their employees earn enough to save for retirement, which is a good thing for everyone.

But those rules severely punish some people seemingly arbitrarily.  Why should it matter how much my coworkers choose to put into their 401k?  If all my coworkers decide they don't want to participate that means I should not be allowed to contribute the max because it fails some arbitrary non-discrimination test (when no actual discrimination took place)?  It seems crazy to me that your coworkers actions on their 401k somehow directly affect the amount you can contribute. 

[MrMoogle]

I keep forgetting about HCE when I bring up Mega Roth, because I'm under the limit.  So I'm helping those out in my company :)

[seattlecyclone]

I think the non-discrimination testing makes sense. These rules give the executives an incentive to make sure their employees earn enough to save for retirement, which is a good thing for everyone.

But those rules severely punish some people seemingly arbitrarily.  Why should it matter how much my coworkers choose to put into their 401k?  If all my coworkers decide they don't want to participate that means I should not be allowed to contribute the max because it fails some arbitrary non-discrimination test (when no actual discrimination took place)?  It seems crazy to me that your coworkers actions on their 401k somehow directly affect the amount you can contribute. 

I would argue it's unlikely that your coworkers are deciding as a group that they don't want to save for retirement. More likely is that they aren't being paid enough to save for retirement. If that's the case, then the plan implicitly favors the higher-earning employees. That's where the "discrimination" comes into play.

[ShoulderThingThatGoesUp]

I think the non-discrimination testing makes sense. These rules give the executives an incentive to make sure their employees earn enough to save for retirement, which is a good thing for everyone.

But those rules severely punish some people seemingly arbitrarily.  Why should it matter how much my coworkers choose to put into their 401k?  If all my coworkers decide they don't want to participate that means I should not be allowed to contribute the max because it fails some arbitrary non-discrimination test (when no actual discrimination took place)?  It seems crazy to me that your coworkers actions on their 401k somehow directly affect the amount you can contribute. 

I would argue it's unlikely that your coworkers are deciding as a group that they don't want to save for retirement. More likely is that they aren't being paid enough to save for retirement. If that's the case, then the plan implicitly favors the higher-earning employees. That's where the "discrimination" comes into play.

Isn't a big part of this site that most people earn enough to save, but they choose not to because they make bad decisions?

[seattlecyclone]

Sure, perhaps I should have worded that better. They don't think they're being paid enough to save for retirement. The point still applies. Why should I, as a taxpayer, support giving tax breaks to executives who let their rank-and-file employees go without saving for retirement, shifting more of a future burden to taxpayers?

[frugalnacho]

I think the non-discrimination testing makes sense. These rules give the executives an incentive to make sure their employees earn enough to save for retirement, which is a good thing for everyone.

But those rules severely punish some people seemingly arbitrarily.  Why should it matter how much my coworkers choose to put into their 401k?  If all my coworkers decide they don't want to participate that means I should not be allowed to contribute the max because it fails some arbitrary non-discrimination test (when no actual discrimination took place)?  It seems crazy to me that your coworkers actions on their 401k somehow directly affect the amount you can contribute. 

I would argue it's unlikely that your coworkers are deciding as a group that they don't want to save for retirement. More likely is that they aren't being paid enough to save for retirement. If that's the case, then the plan implicitly favors the higher-earning employees. That's where the "discrimination" comes into play.

Isn't a big part of this site that most people earn enough to save, but they choose not to because they make bad decisions?

Yea.  I have read countless threads on here and bogleheads where someone was severely limited in their 401k contributions (as in limited to less than half of the IRS limit) because other coworkers making the same pay as them chose not to contribute.   So you and your coworkers make 50k/yr each, but they all spend 55k/yr and don't contribute.  Now the IRS limits your contribution because it fails some anti discrimination test.  I don't know exactly how it's calculated, I just know i've seen a ton of threads with people getting returned contributions because of it (and they were not HCE, just saved a high % of income mustachian style).

[frugalnacho]

Sure, perhaps I should have worded that better. They don't think they're being paid enough to save for retirement. The point still applies. Why should I, as a taxpayer, support giving tax breaks to executives who let their rank-and-file employees go without saving for retirement, shifting more of a future burden to taxpayers?

The problem i've seen is that it isn't limited to HCE only.  It limits everyone including mustachians making reasonable amounts of money and trying to save a significant portion of it.

[seattlecyclone]

Sure, perhaps I should have worded that better. They don't think they're being paid enough to save for retirement. The point still applies. Why should I, as a taxpayer, support giving tax breaks to executives who let their rank-and-file employees go without saving for retirement, shifting more of a future burden to taxpayers?

The problem i've seen is that it isn't limited to HCE only.  It limits everyone including mustachians making reasonable amounts of money and trying to save a significant portion of it.

The anti-discrimination test only applies to highly-compensated employees, who are officially defined as people who earn over $115k and are in the top 20% of earners in the company. If these people's average contribution (as a percentage of pay) is greater than 125% of the average contribution of everyone who isn't an HCE (or 2% higher, whichever is more), then the plan fails the test. So if the HCEs contribute 10% on average, the non-HCEs need to contribute at least 8%. Remember that the HCEs already earn more than the non-HCEs, so the average dollar amount contributed by these folks can still be quite a bit higher and still comply with the rules.

For purposes of these tests, the company should really encourage its non-HCEs to be Mustachian and max out the plan. Because if you're earning less than $115k and maxing out the plan, you're by definition contributing over 15%.

[frugalnacho]

Sure, perhaps I should have worded that better. They don't think they're being paid enough to save for retirement. The point still applies. Why should I, as a taxpayer, support giving tax breaks to executives who let their rank-and-file employees go without saving for retirement, shifting more of a future burden to taxpayers?

The problem i've seen is that it isn't limited to HCE only.  It limits everyone including mustachians making reasonable amounts of money and trying to save a significant portion of it.

The anti-discrimination test only applies to highly-compensated employees, who are officially defined as people who earn over $115k and are in the top 20% of earners in the company. If these people's average contribution (as a percentage of pay) is greater than 125% of the average contribution of everyone who isn't an HCE (or 2% higher, whichever is more), then the plan fails the test. So if the HCEs contribute 10% on average, the non-HCEs need to contribute at least 8%. Remember that the HCEs already earn more than the non-HCEs, so the average dollar amount contributed by these folks can still be quite a bit higher and still comply with the rules.

For purposes of these tests, the company should really encourage its non-HCEs to be Mustachian and max out the plan. Because if you're earning less than $115k and maxing out the plan, you're by definition contributing over 15%.

Ok gotcha.  I could have sworn I read threads about people that were not HCE that were limited in their contributions but I could be mistaken. 

[skunkfunk]

Sure, perhaps I should have worded that better. They don't think they're being paid enough to save for retirement. The point still applies. Why should I, as a taxpayer, support giving tax breaks to executives who let their rank-and-file employees go without saving for retirement, shifting more of a future burden to taxpayers?

The problem i've seen is that it isn't limited to HCE only.  It limits everyone including mustachians making reasonable amounts of money and trying to save a significant portion of it.

The anti-discrimination test only applies to highly-compensated employees, who are officially defined as people who earn over $115k and are in the top 20% of earners in the company. If these people's average contribution (as a percentage of pay) is greater than 125% of the average contribution of everyone who isn't an HCE (or 2% higher, whichever is more), then the plan fails the test. So if the HCEs contribute 10% on average, the non-HCEs need to contribute at least 8%. Remember that the HCEs already earn more than the non-HCEs, so the average dollar amount contributed by these folks can still be quite a bit higher and still comply with the rules.

For purposes of these tests, the company should really encourage its non-HCEs to be Mustachian and max out the plan. Because if you're earning less than $115k and maxing out the plan, you're by definition contributing over 15%.

Ok gotcha.  I could have sworn I read threads about people that were not HCE that were limited in their contributions but I could be mistaken.

You can be limited for other reasons, e.g. your plan sucks and employer won't work with you.