Getting Mega Back Door Roth Provisions into a 401k?

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vtBob
Posts: 64
Joined: Tue Mar 10, 2015 9:31 pm

Getting Mega Back Door Roth Provisions into a 401k?

Post by vtBob » Wed Aug 08, 2018 9:20 pm

so i know that we're up for our 401k renewal and i'd like to have the option to someday hopefully be able to do a mega back door roth.

I know that they need to allow for after tax contributions and in service withdrawals. I also know from family that adding complexity to a 401k can be a hard sell, but I also know it can be a good savings vehicle for the owner and others.

Can anyone share some of the cons to adding those provisions to a policy so I can be prepared?

Thanks in advance.

simas
Posts: 229
Joined: Wed Apr 04, 2007 5:50 pm

Re: Getting Mega Back Door Roth Provisions into a 401k?

Post by simas » Wed Aug 08, 2018 9:41 pm

vtBob wrote:
Wed Aug 08, 2018 9:20 pm
so i know that we're up for our 401k renewal and i'd like to have the option to someday hopefully be able to do a mega back door roth.

I know that they need to allow for after tax contributions and in service withdrawals. I also know from family that adding complexity to a 401k can be a hard sell, but I also know it can be a good savings vehicle for the owner and others.

Can anyone share some of the cons to adding those provisions to a policy so I can be prepared?

Thanks in advance.
it depends on how the plan is set up and subject to what tests it is - your HR/benefits person would know.
Adding an after tax non roth portion to the plan may subject the plan to additional testing and if plan can not pass those tests, the mega backdoor roth progress would be DOA

deeppizza
Posts: 42
Joined: Wed Mar 16, 2016 11:16 pm

Re: Getting Mega Back Door Roth Provisions into a 401k?

Post by deeppizza » Wed Aug 08, 2018 10:26 pm

I'll echo the hard sell; it took 3 years of lobbying HR before they agreed to add a Roth option to our 401k/403b plans (which still ended up with some shady shenanigans - they won't provide a company match for any Roth contributions, only to the pre-tax contributions). Now I'm trying to get them to allow after-tax contributions and in-plan Roth conversions, and have been told that they will "mention this to our 401k/403b committee at their next meeting". But I foresee another lengthy battle.

DarkHelmetII
Posts: 114
Joined: Mon Jul 24, 2017 12:25 pm

Re: Getting Mega Back Door Roth Provisions into a 401k?

Post by DarkHelmetII » Thu Aug 09, 2018 6:43 am

deeppizza wrote:
Wed Aug 08, 2018 10:26 pm
I'll echo the hard sell; it took 3 years of lobbying HR before they agreed to add a Roth option to our 401k/403b plans (which still ended up with some shady shenanigans - they won't provide a company match for any Roth contributions, only to the pre-tax contributions). Now I'm trying to get them to allow after-tax contributions and in-plan Roth conversions, and have been told that they will "mention this to our 401k/403b committee at their next meeting". But I foresee another lengthy battle.
Curious to know how big your company is? I work for a larger company (10,000+ people). I mentioned it to HR, they said they'd look it into. But I am really skeptical HR appreciates the magnitude of possible benefits this can bring to employees. Having said that, perhaps I am underestimating the time and expense associated with adding this option.

deeppizza
Posts: 42
Joined: Wed Mar 16, 2016 11:16 pm

Re: Getting Mega Back Door Roth Provisions into a 401k?

Post by deeppizza » Thu Aug 09, 2018 10:07 am

I'm employed by a regional health system which employs > 25,000, so I can understand that it would be a large undertaking to make changes to the retirement plans for all employees. But I agree with you that it appears the HR sometimes has no clue about the potential long term retirement/savings benefits to their employees, much less the fact that their regional competitors allow those provisions in their plans.

vtBob
Posts: 64
Joined: Tue Mar 10, 2015 9:31 pm

Re: Getting Mega Back Door Roth Provisions into a 401k?

Post by vtBob » Thu Aug 09, 2018 10:13 am

I'm still not sure what the downsides are though?

Wouldn't I work directly with the 401k provider or some other entity who is not HR to initiate the in kind transfer and setup the after tax contribution? where do they come into the mix?

deeppizza
Posts: 42
Joined: Wed Mar 16, 2016 11:16 pm

Re: Getting Mega Back Door Roth Provisions into a 401k?

Post by deeppizza » Thu Aug 09, 2018 10:17 am

My employer's retirement plans are run through Vanguard, and have great fund choices. When I've called Vanguard to directly ask them how I can make after-tax contributions and in-plan transfers, they told me that my plan is not authorized to do that (which is at the discretion of the employer because that is how they've set it up).

niceguy7376
Posts: 2061
Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: Getting Mega Back Door Roth Provisions into a 401k?

Post by niceguy7376 » Thu Aug 09, 2018 10:18 am

deeppizza wrote:
Wed Aug 08, 2018 10:26 pm
they won't provide a company match for any Roth contributions, only to the pre-tax contributions
I dont think company can make that decision. It is to be governed by the 401k rules set by the govt. Company will only make a match into the traditional part for any roth contributions by employees.

deeppizza
Posts: 42
Joined: Wed Mar 16, 2016 11:16 pm

Re: Getting Mega Back Door Roth Provisions into a 401k?

Post by deeppizza » Thu Aug 09, 2018 10:51 am

Yeah, I realize that all matches only go into a traditional 401k; but they've set up the plan so that you will only get a % match if you contribute at least 4% to traditional 401k/403b per pay cycle. You can contribute whatever amount you want to the Roth 401k/403b, but those contributions will not get matched at all. Thus, if you want to get a match, you have to contribute at least the minimum 4% to 401/403. It makes a difference because I max out the match going into 401k after 8 months (with the majority of my savings going to the traditional 403b), leaving less room to contribute to my Roth 403b. I'm basically forced to split my 18.5K into ~ 12K in traditional 403b, and ~ 6.5K in Roth 403b if I want to get full match. I know...first world problems, but I would rather just put all 18.5K into Roth 403b, and still get full match.

When I mentioned this last year, this was the response I got:
"A number of years ago, *** established a core 401k option which includes an employer matching contribution to support our employees as they plan for retirement. The match is only aligned to the core 401k option to promote pre-tax savings in the plan. *** has aligned the employer match to promote the pre-tax option as this approach is the most prevalent design for employer 401k plan offerings, incents pre-tax contributing which better positions plan participants through tax deferred savings and in general reduces the complexity in administration and communications of the plan. *** may consider a match for the Roth option in the future. In the meantime, I would expect that a fair number of people will modify their contributions to a 4% pre-tax (to get the full match) and a certain % as Roth on top of the pre-tax."

Pigeye Brewster
Posts: 184
Joined: Thu Oct 05, 2017 7:33 pm

Re: Getting Mega Back Door Roth Provisions into a 401k?

Post by Pigeye Brewster » Thu Aug 09, 2018 10:57 am

simas wrote:
Wed Aug 08, 2018 9:41 pm
vtBob wrote:
Wed Aug 08, 2018 9:20 pm
so i know that we're up for our 401k renewal and i'd like to have the option to someday hopefully be able to do a mega back door roth.

I know that they need to allow for after tax contributions and in service withdrawals. I also know from family that adding complexity to a 401k can be a hard sell, but I also know it can be a good savings vehicle for the owner and others.

Can anyone share some of the cons to adding those provisions to a policy so I can be prepared?

Thanks in advance.
it depends on how the plan is set up and subject to what tests it is - your HR/benefits person would know.
Adding an after tax non roth portion to the plan may subject the plan to additional testing and if plan can not pass those tests, the mega backdoor roth progress would be DOA
To elaborate further on this, non-Roth after-tax contributions by highly compensated employees are subject to ACP testing. That applies even if the plan is a safe harbor plan. This results in additional plan administration expense. Although there can be exceptions, those who would generally be in a position to make non-Roth after-tax are likely to be HCEs. They might not be able to pass the test without significant non-HCE participation. So the plan may end up with additional testing expense and little or no overall benefit.

megabad
Posts: 362
Joined: Fri Jun 01, 2018 4:00 pm

Re: Getting Mega Back Door Roth Provisions into a 401k?

Post by megabad » Thu Aug 09, 2018 11:35 am

Pigeye Brewster wrote:
Thu Aug 09, 2018 10:57 am
To elaborate further on this, non-Roth after-tax contributions by highly compensated employees are subject to ACP testing. That applies even if the plan is a safe harbor plan. This results in additional plan administration expense. Although there can be exceptions, those who would generally be in a position to make non-Roth after-tax are likely to be HCEs. They might not be able to pass the test without significant non-HCE participation. So the plan may end up with additional testing expense and little or no overall benefit.
+1 This is potentially the primary disadvantage.

vtBob
Posts: 64
Joined: Tue Mar 10, 2015 9:31 pm

Re: Getting Mega Back Door Roth Provisions into a 401k?

Post by vtBob » Thu Aug 09, 2018 1:27 pm

super helpful. thank you!

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