Mega Roth Conversions
Bill’s company has 5 employees and they have a traditional safe harbor 401k plan. He is the owner and is 59.5. He has been maxing out his p/r deducted contributions each year, but the company only pays in the Safe Harbor 3% amount, no profit sharing. He wants to contribute his own after tax money to get the maximum amount into his 401k allowed by IRS, then take those after tax contributions and roll them into his Roth using the Mega Roth Conversion. He can do in-service rollovers from his 401k plan. I’m being told by his 3rd party administrator that he cannot do it because it may violate non-discrimination testing. Is that true? It seems as though since he is using his own after tax savings to fund his plan, the testing wouldn’t come into play. Can you help clear this up? Thank You
Permalink Submitted by Alan - IRA critic on Tue, 2022-03-08 00:37
Yes, the administrator is correct. Non Roth after tax contributions to a safe harbor plan triggers the ACP test.
Permalink Submitted by William Tuttle on Tue, 2022-03-08 00:42
I have no idea what you mean by “p/r” contributions
A safe harbor 401k with 3% contributions only provides “safe harbor” from ADP testing for employee deferrals, ACP testing for the 3% non-elective (AKA “profit sharing”) employer contributions and “top-heavy” testing.
The TPA is correct. Not only would the plan have to support employee after-tax contributions, in-plan Roth rollovers and/or in-service rollovers. It would have to pass ACP testing on the employee after-tax contributions.
It is quite likely that the plan would fail such testing and the owner’s employee after-tax contribution percentage would be severely limited.
Permalink Submitted by David Schlossberg on Wed, 2024-01-31 18:42
Is there another type of safe harbor contirbution or other provision that would make the Mega Back Door Roth work?
Permalink Submitted by Alan - IRA critic on Wed, 2024-01-31 19:25
No, any plans that offer non Roth after tax contributions will be subject to the ACP test.