Why companies don't allow post-tax 401k contribution?

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LmG7119
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Why companies don't allow post-tax 401k contribution?

Post by LmG7119 »

I'm trying to work with my employer to allow post-tax 401k contribution. They use Principal which I'm not a big fan of.
How can I convince them? Did anybody do this with their employers?

Thanks
cashheavy18
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Re: Why companies don't allow post-tax 401k contribution?

Post by cashheavy18 »

I asked this question to our HR director a few weeks ago and the response was, that it is due to costs.

They will continue to review total retirement benefit options, but at this time there are no plans to pursue this option due to the cost.

I'd be curious to know what %/dollar amount cost this type of option represents to an employer.
Alan S.
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Re: Why companies don't allow post-tax 401k contribution?

Post by Alan S. »

An after tax sub account creates an additional accounting category and because the balance in the account is generally available for distribution, the total assets in the plan only grow a small amount. Distributions and rollovers out of the plan of this balance also have a cost. But perhaps the largest cost is additional discrimination testing as the after tax account is subject to ACP testing. If the test fails, then distributions or other adjustments must be made for affected accounts.

The employer will also be interested in how many employees will actually use the after tax account. While lack of use will also reduce costs, there is still a basic cost of establishing the accounting support even if only a couple employees contribute. This account will also not matter to lower paid staff or help retain them, but it will for higher paid staff that would contribute.
zrail
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Re: Why companies don't allow post-tax 401k contribution?

Post by zrail »

Another thing is that access to an after tax subaccount is incompatible with the safe harbor rules.
retire2022
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Re: Why companies don't allow post-tax 401k contribution?

Post by retire2022 »

lepa71 wrote: Mon Dec 31, 2018 12:40 pm I'm trying to work with my employer to allow post-tax 401k contribution. They use Principal which I'm not a big fan of.
How can I convince them? Did anybody do this with their employers?

Thanks
Op, you mean "After Tax" aka Roth 401K instead of your term post-tax?
Cycle
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Re: Why companies don't allow post-tax 401k contribution?

Post by Cycle »

retire2022 wrote: Mon Dec 31, 2018 2:43 pm
lepa71 wrote: Mon Dec 31, 2018 12:40 pm I'm trying to work with my employer to allow post-tax 401k contribution. They use Principal which I'm not a big fan of.
How can I convince them? Did anybody do this with their employers?

Thanks
Op, you mean "After Tax" aka Roth 401K instead of your term post-tax?
I think OP means megabackdoor Roth. Frustratingly neither my DW or my megacorp allow it either.

https://www.madfientist.com/after-tax-contributions/
Never look back unless you are planning to go that way
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JoMoney
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Re: Why companies don't allow post-tax 401k contribution?

Post by JoMoney »

retire2022 wrote: Mon Dec 31, 2018 2:43 pm
lepa71 wrote: Mon Dec 31, 2018 12:40 pm I'm trying to work with my employer to allow post-tax 401k contribution. They use Principal which I'm not a big fan of.
How can I convince them? Did anybody do this with their employers?

Thanks
Op, you mean "After Tax" aka Roth 401K instead of your term post-tax?
A Roth 401k contribution is post-tax, which may or may not be allowed, but there are also plans that allow after tax contributions to a traditional 401k. In a traditional 401k the after tax contributions are accounted for separately by the plan administrator. Taxes will be owed on the growth of the after-tax contributions, but no taxes will be owed on the contributions. The after-tax contributions can be made above the the limits on pre-tax or Roth contributions.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Nate79
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Re: Why companies don't allow post-tax 401k contribution?

Post by Nate79 »

Tell your company you will gladly personally cover any addition costs to add the option you desire. You are willing to do that right?
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noraz123
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Re: Why companies don't allow post-tax 401k contribution?

Post by noraz123 »

I have been trying to get my employer to offer, and with the help of a coworker, we were able to convince them to make necessary changes this coming year.

Our company's 401k is with Fidelity. There are no ongoing costs associated with changing the plan to allow after tax contributions. However, I do believe that there are some nominal one time charges (~$5k) to ammend our plan.

The issue we've faced is that people in benefits weren't aware of what after tax contributions were, and it was hard to make any traction. Moreover, there's been turnover in the department, so any education and headway that we made previously was lost. Thankfully, the company hired a new person in benefits who has been quite helpful.

Thankfully, mega backdoor Roth IRA contributions are becoming more well-known and understood. It really is a low cost benefit that companies can offer if they are already offering a 401k.
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LmG7119
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Re: Why companies don't allow post-tax 401k contribution?

Post by LmG7119 »

Cycle wrote: Mon Dec 31, 2018 2:51 pm
retire2022 wrote: Mon Dec 31, 2018 2:43 pm
lepa71 wrote: Mon Dec 31, 2018 12:40 pm I'm trying to work with my employer to allow post-tax 401k contribution. They use Principal which I'm not a big fan of.
How can I convince them? Did anybody do this with their employers?

Thanks
Op, you mean "After Tax" aka Roth 401K instead of your term post-tax?
I think OP means megabackdoor Roth. Frustratingly neither my DW or my megacorp allow it either.

https://www.madfientist.com/after-tax-contributions/
Yes, sorry for the confusion. This way I can do the megabackdoor roth conversion.
Willy
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Re: Why companies don't allow post-tax 401k contribution?

Post by Willy »

It probably isn't a big factor for most employers considering allowing after-tax contributions, but allowing after-tax contributions introduces another variable that can cause record keeping and tax reporting errors when a distribution is made from the plan.. Things can go wrong, particularly when the record keeping function is transferred from one record keeper to another. IAs an employee benefits attorney, I have seen situations where it is very difficult and expensive to correct mistakes regarding after-tax accounts.
Spirit Rider
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Re: Why companies don't allow post-tax 401k contribution?

Post by Spirit Rider »

zrail wrote: Mon Dec 31, 2018 2:38 pm Another thing is that access to an after tax subaccount is incompatible with the safe harbor rules.
This is an incorrect understanding of a real problem. Any 401k plan including a safe harbor 401k plan can allow employee after-tax contributions.

A safe harbor plan does not require Actual Deferral Percentage (ADP) and Actual Contribution (ACP) testing. However, even in a safe harbor 401k plan employee after-tax contributions are subject to ACP testing.

Allowing employee after-tax contributions and in-service rollovers results in additional adminstrative tasks and costs:
  • Different payroll processing.
  • Separate accounting for employee after-tax contributions and earnings.
  • Processes, customer support and 1099-R reporting of in-service rollovers and/or IRRs.
  • ACP testing, notice and return of HCE excess contributions and earnings, including from already rolled over amounts.
A company that adopted a safe harbor 401k to avoid the complexity, cost and hassles of testing, testing failures and return of excess contributions. Is probably not eager to amend their plan for a feature that may not be used by that many employees.
learning30
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Re: Why companies don't allow post-tax 401k contribution?

Post by learning30 »

JoMoney wrote: Mon Dec 31, 2018 3:56 pm
retire2022 wrote: Mon Dec 31, 2018 2:43 pm
lepa71 wrote: Mon Dec 31, 2018 12:40 pm I'm trying to work with my employer to allow post-tax 401k contribution. They use Principal which I'm not a big fan of.
How can I convince them? Did anybody do this with their employers?

Thanks
Op, you mean "After Tax" aka Roth 401K instead of your term post-tax?
A Roth 401k contribution is post-tax, which may or may not be allowed, but there are also plans that allow after tax contributions to a traditional 401k. In a traditional 401k the after tax contributions are accounted for separately by the plan administrator. Taxes will be owed on the growth of the after-tax contributions, but no taxes will be owed on the contributions. The after-tax contributions can be made above the the limits on pre-tax or Roth contributions.
Late to the show but I'm proposing this to my employer soon. I am confused about one thing - are after-tax contribution gains taxed at ordinary income or capital gains rates?
learning30
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Re: Why companies don't allow post-tax 401k contribution?

Post by learning30 »

noraz123 wrote: Mon Dec 31, 2018 5:44 pm I have been trying to get my employer to offer, and with the help of a coworker, we were able to convince them to make necessary changes this coming year.

Our company's 401k is with Fidelity. There are no ongoing costs associated with changing the plan to allow after tax contributions. However, I do believe that there are some nominal one time charges (~$5k) to ammend our plan.

The issue we've faced is that people in benefits weren't aware of what after tax contributions were, and it was hard to make any traction. Moreover, there's been turnover in the department, so any education and headway that we made previously was lost. Thankfully, the company hired a new person in benefits who has been quite helpful.

Thankfully, mega backdoor Roth IRA contributions are becoming more well-known and understood. It really is a low cost benefit that companies can offer if they are already offering a 401k.
My employer plan is also through Fidelity and I want to propose them to add this as an option. Curious, was this at a large or small company with the issues you had?
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Re: Why companies don't allow post-tax 401k contribution?

Post by Dottie57 »

Cycle wrote: Mon Dec 31, 2018 2:51 pm
retire2022 wrote: Mon Dec 31, 2018 2:43 pm
lepa71 wrote: Mon Dec 31, 2018 12:40 pm I'm trying to work with my employer to allow post-tax 401k contribution. They use Principal which I'm not a big fan of.
How can I convince them? Did anybody do this with their employers?

Thanks
Op, you mean "After Tax" aka Roth 401K instead of your term post-tax?
I think OP means megabackdoor Roth. Frustratingly neither my DW or my megacorp allow it either.

https://www.madfientist.com/after-tax-contributions/
Neither did my fortune 50 mega corp. The plan was safe harbor so I assume it was cost.
Dottie57
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Re: Why companies don't allow post-tax 401k contribution?

Post by Dottie57 »

Cycle wrote: Mon Dec 31, 2018 2:51 pm
retire2022 wrote: Mon Dec 31, 2018 2:43 pm
lepa71 wrote: Mon Dec 31, 2018 12:40 pm I'm trying to work with my employer to allow post-tax 401k contribution. They use Principal which I'm not a big fan of.
How can I convince them? Did anybody do this with their employers?

Thanks
Op, you mean "After Tax" aka Roth 401K instead of your term post-tax?
I think OP means megabackdoor Roth. Frustratingly neither my DW or my megacorp allow it either.

https://www.madfientist.com/after-tax-contributions/
Neither did my fortune 50 mega corp. The plan was safe harbor so I assume it was cost.
learning30
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Re: Why companies don't allow post-tax 401k contribution?

Post by learning30 »

Dottie57 wrote: Wed May 29, 2024 10:27 pm
Cycle wrote: Mon Dec 31, 2018 2:51 pm
retire2022 wrote: Mon Dec 31, 2018 2:43 pm
lepa71 wrote: Mon Dec 31, 2018 12:40 pm I'm trying to work with my employer to allow post-tax 401k contribution. They use Principal which I'm not a big fan of.
How can I convince them? Did anybody do this with their employers?

Thanks
Op, you mean "After Tax" aka Roth 401K instead of your term post-tax?
I think OP means megabackdoor Roth. Frustratingly neither my DW or my megacorp allow it either.

https://www.madfientist.com/after-tax-contributions/
Neither did my fortune 50 mega corp. The plan was safe harbor so I assume it was cost.
Aren't most plans safe harbor? I would think it's such a low-cost benefit that employers could add to attract and retain top employees. There will be work and effort involved of course, but this is a doable project.
SnowBog
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Re: Why companies don't allow post-tax 401k contribution?

Post by SnowBog »

learning30 wrote: Wed May 29, 2024 10:17 pm
JoMoney wrote: Mon Dec 31, 2018 3:56 pm
retire2022 wrote: Mon Dec 31, 2018 2:43 pm
lepa71 wrote: Mon Dec 31, 2018 12:40 pm
I'm trying to work with my employer to allow post-tax 401k contribution. They use Principal which I'm not a big fan of.
How can I convince them? Did anybody do this with their employers?

Thanks
Op, you mean "After Tax" aka Roth 401K instead of your term post-tax?
A Roth 401k contribution is post-tax, which may or may not be allowed, but there are also plans that allow after tax contributions to a traditional 401k. In a traditional 401k the after tax contributions are accounted for separately by the plan administrator. Taxes will be owed on the growth of the after-tax contributions, but no taxes will be owed on the contributions. The after-tax contributions can be made above the the limits on pre-tax or Roth contributions.
Late to the show but I'm proposing this to my employer soon. I am confused about one thing - are after-tax contribution gains taxed at ordinary income or capital gains rates?
Edited to correct my mistake.

"Yes". In essence, they are effectively the same as "taxable" gains, where the length of the holding will determine if they are "short" (ordinary) or "long" (capital) gains - and thus which taxation rates apply.

That said, ideally you have minimal - if not $0 - "after-tax" gains. The whole point of having access to a Mega Backdoor Roth is to convert the funds to Roth! In an ideal scenario, the employer's plan will offer "in-plan automatic daily conversions" - meaning if you contribute $100 to "after-tax" it immediately gets converted to $100 Roth with $0 gains. If a plan doesn't, then you'll want to understand things like "how frequently" and at "what cost" (if any) can funds be converted. Plans can range from "unlimited conversions at no cost" to "first X conversions free with costs for additional" to "fee for each conversion and only X allowed per year". Those differences might impact how you invest your funds while waiting for conversions (which is its own set of questions - namely do you have the ability to invest your "after-tax" dollars differently if you want).
Last edited by SnowBog on Thu May 30, 2024 2:07 am, edited 1 time in total.
learning30
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Re: Why companies don't allow post-tax 401k contribution?

Post by learning30 »

SnowBog wrote: Wed May 29, 2024 10:36 pm
learning30 wrote: Wed May 29, 2024 10:17 pm
JoMoney wrote: Mon Dec 31, 2018 3:56 pm
retire2022 wrote: Mon Dec 31, 2018 2:43 pm
lepa71 wrote: Mon Dec 31, 2018 12:40 pm
I'm trying to work with my employer to allow post-tax 401k contribution. They use Principal which I'm not a big fan of.
How can I convince them? Did anybody do this with their employers?

Thanks
Op, you mean "After Tax" aka Roth 401K instead of your term post-tax?
A Roth 401k contribution is post-tax, which may or may not be allowed, but there are also plans that allow after tax contributions to a traditional 401k. In a traditional 401k the after tax contributions are accounted for separately by the plan administrator. Taxes will be owed on the growth of the after-tax contributions, but no taxes will be owed on the contributions. The after-tax contributions can be made above the the limits on pre-tax or Roth contributions.
Late to the show but I'm proposing this to my employer soon. I am confused about one thing - are after-tax contribution gains taxed at ordinary income or capital gains rates?
"Yes". In essence, they are effectively the same as "taxable" gains, where the length of the holding will determine if they are "short" (ordinary) or "long" (capital) gains - and thus which taxation rates apply.

That said, ideally you have minimal - if not $0 - "after-tax" gains. The whole point of having access to a Mega Backdoor Roth is to convert the funds to Roth! In an ideal scenario, the employer's plan will offer "in-plan automatic daily conversions" - meaning if you contribute $100 to "after-tax" it immediately gets converted to $100 Roth with $0 gains. If a plan doesn't, then you'll want to understand things like "how frequently" and at "what cost" (if any) can funds be converted. Plans can range from "unlimited conversions at no cost" to "first X conversions free with costs for additional" to "fee for each conversion and only X allowed per year". Those differences might impact how you invest your funds while waiting for conversions (which is its own set of questions - namely do you have the ability to invest your "after-tax" dollars differently if you want).
Ok, so the earnings are taxed at capital gains rates got it.

That is good to know about all the specifics like that. Didn't consider that in my thinking!
SnowBog
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Re: Why companies don't allow post-tax 401k contribution?

Post by SnowBog »

learning30 wrote: Wed May 29, 2024 10:34 pm
Dottie57 wrote: Wed May 29, 2024 10:27 pm
Cycle wrote: Mon Dec 31, 2018 2:51 pm
retire2022 wrote: Mon Dec 31, 2018 2:43 pm
lepa71 wrote: Mon Dec 31, 2018 12:40 pm I'm trying to work with my employer to allow post-tax 401k contribution. They use Principal which I'm not a big fan of.
How can I convince them? Did anybody do this with their employers?

Thanks
Op, you mean "After Tax" aka Roth 401K instead of your term post-tax?
I think OP means megabackdoor Roth. Frustratingly neither my DW or my megacorp allow it either.

https://www.madfientist.com/after-tax-contributions/
Neither did my fortune 50 mega corp. The plan was safe harbor so I assume it was cost.
Aren't most plans safe harbor? I would think it's such a low-cost benefit that employers could add to attract and retain top employees. There will be work and effort involved of course, but this is a doable project.
According to Microsoft Copilot, based on data available/cited from 2020:
  • 51% of private-industry employees in the US have access to 401k like plans
  • 47% of private-industry employees in the US participate in them
  • Approximately 12% of participants are estimated to max them out (which sounds higher than I'd expect)
  • Which works out to roughly 5.6% of US private-industry employees
And I'd wager the distribution of that 5.6% is likely highly concentrated to specific industries/employers.

Don't get me wrong, I'd love to see the option more readily available, especially if it's a negligible cost to the employer (that wouldn't cause them to cut pay/benefits to offset the cost), but unless/until employees start prioritizing savings such that its far more common to have people max out their retirement accounts, its unlikely to be "mainstream."

As an anecdote, when my spouse changed their contribute to max out - and did so before the end-of-the-year, it created let's say "confusion" with their employer payroll organization. They didn't say as much, but based on how they handled it, it sure seemed like my spouse was the first person to ever max out their contributions (or at least mid-year). Granted this isn't a large organization - but still, you'd think over decades of existing, this wouldn't be as uncommon as they sure made it seem...
Makefile
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Re: Why companies don't allow post-tax 401k contribution?

Post by Makefile »

Have after-tax 401(k) contributions always been somewhat obscure, or were they more common and more known long ago (i.e. the 1980s)?
SnowBog
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Re: Why companies don't allow post-tax 401k contribution?

Post by SnowBog »

learning30 wrote: Wed May 29, 2024 10:52 pm
SnowBog wrote: Wed May 29, 2024 10:36 pm
learning30 wrote: Wed May 29, 2024 10:17 pm
JoMoney wrote: Mon Dec 31, 2018 3:56 pm
retire2022 wrote: Mon Dec 31, 2018 2:43 pm

Op, you mean "After Tax" aka Roth 401K instead of your term post-tax?
A Roth 401k contribution is post-tax, which may or may not be allowed, but there are also plans that allow after tax contributions to a traditional 401k. In a traditional 401k the after tax contributions are accounted for separately by the plan administrator. Taxes will be owed on the growth of the after-tax contributions, but no taxes will be owed on the contributions. The after-tax contributions can be made above the the limits on pre-tax or Roth contributions.
Late to the show but I'm proposing this to my employer soon. I am confused about one thing - are after-tax contribution gains taxed at ordinary income or capital gains rates?
Edited to correct my mistake.

"Yes". In essence, they are effectively the same as "taxable" gains, where the length of the holding will determine if they are "short" (ordinary) or "long" (capital) gains - and thus which taxation rates apply.


That said, ideally you have minimal - if not $0 - "after-tax" gains. The whole point of having access to a Mega Backdoor Roth is to convert the funds to Roth! In an ideal scenario, the employer's plan will offer "in-plan automatic daily conversions" - meaning if you contribute $100 to "after-tax" it immediately gets converted to $100 Roth with $0 gains. If a plan doesn't, then you'll want to understand things like "how frequently" and at "what cost" (if any) can funds be converted. Plans can range from "unlimited conversions at no cost" to "first X conversions free with costs for additional" to "fee for each conversion and only X allowed per year". Those differences might impact how you invest your funds while waiting for conversions (which is its own set of questions - namely do you have the ability to invest your "after-tax" dollars differently if you want).
Ok, so the earnings are taxed at capital gains rates got it.

That is good to know about all the specifics like that. Didn't consider that in my thinking!
Edited to correct my mistake.

I'll try again... Earnings if they were held longer than 1-year would be taxed at capital gains rates. You don't want that!!!

Ideally, you want "short-term gains" taxed at "ordinary rates", as the goal is to convert "after-tax" funds to Roth ASAP. Using my $100 example before. If your plan doesn't do automatic in-plan daily conversions to Roth, let's say that contribution grows to $102 before you get a chance to convert it. Typically, you'd convert the entire $102, "realizing" $2 of "short-term" gains - and thus owing taxes (at your "ordinary" - aka "marginal" rates) on the $2 gain. But after conversion, you'd have $102 in Roth which would never be taxed again (growing and withdrawing tax-free).

The main benefit of an "after-tax" plan is the Roth conversion. You should get money into Roth ASAP, which again is going to mean "short-term" gains (taxed at "ordinary" rates). That's a "good thing" thing in this case - as you want the long-term growth to be in Roth and never taxed again!

But yes, if for some reason you "forget" to convert after-tax to Roth, you can benefit from "long term" gains. Although I feel like that's a really bad "consolation prize."

As others have pointed out my mistake, after-tax gains are always taxed as "ordinary" income. Just more reason to convert to Roth ASAP.
Last edited by SnowBog on Thu May 30, 2024 2:12 am, edited 1 time in total.
SnowBog
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Re: Why companies don't allow post-tax 401k contribution?

Post by SnowBog »

Makefile wrote: Wed May 29, 2024 10:57 pm Have after-tax 401(k) contributions always been somewhat obscure, or were they more common and more known long ago (i.e. the 1980s)?
Were more people maxing out their "normal" contributions in the 1980's, such that more people would have benefited from contributing additional funds to an "after-tax" plan? I doubt it...

From my perspective, they've always been obscure.

As far as I know, only 1 employer out of 10+ myself and spouse have worked for had a plan that allowed them. I haven't "asked", but I'd wager that if I asked our "extended family", it would probably be 1 out of 50+ employers over their work career...

Even within my employer that offers them, my impression is very few - if any - of my direct co-workers are aware of what it is and why they should consider using it. I've previously shared my "employer benefits" content with employees, and it always comes up as "I didn't know that", followed by "why would I do that", sadly usually followed by "I probably should get more serious about my retirement savings." :shock:

But ignorance is powerful... And I'm just as guilty. When I started with this employer, I remember seeing the option for additional "after-tax" contributions and thinking "that seems a bad idea." There was no employer match and no tax-benefits to do so, just lots more restrictions on the funds (no early withdrawals, etc.). And there was no documentation - or attempt to educate - as to the options/ability/benefits of the Roth conversion piece (which at the time was not an "automatic" option, but one you had to know about [read the fine print] and call in to execute). If I could go back and contribute for the many years I missed, my Roth account would likely be 2X what it is now (even more if I add my ignorance on knowing I could do "Backdoor Roth's" as well). :oops:

Having said that, awareness of both Backdoor Roth and Mega Backdoor Roth's (aka "after-tax" 401k) are far more common with the BH forums than they are in the general population. We sometimes forget that...
exodusNH
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Re: Why companies don't allow post-tax 401k contribution?

Post by exodusNH »

Dottie57 wrote: Wed May 29, 2024 10:27 pm
Cycle wrote: Mon Dec 31, 2018 2:51 pm
retire2022 wrote: Mon Dec 31, 2018 2:43 pm
lepa71 wrote: Mon Dec 31, 2018 12:40 pm I'm trying to work with my employer to allow post-tax 401k contribution. They use Principal which I'm not a big fan of.
How can I convince them? Did anybody do this with their employers?

Thanks
Op, you mean "After Tax" aka Roth 401K instead of your term post-tax?
I think OP means megabackdoor Roth. Frustratingly neither my DW or my megacorp allow it either.

https://www.madfientist.com/after-tax-contributions/
Neither did my fortune 50 mega corp. The plan was safe harbor so I assume it was cost.
You can't Safe Harbor your way out of discrimination testing with after-tax contributions. Typically, only the highest-paid people will take advantage of them, making it difficult to pass the discrimination testing.
Yarlonkol12
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Re: Why companies don't allow post-tax 401k contribution?

Post by Yarlonkol12 »

My current employer and previous 2 employers have offered mega backdoor roth, but it wasn't until 2018 that I first had access. I know all the big tech companies offer it, as do many smaller tech companies that aspire to hire similar staff

That said, many ICs at these companies have TC in the 300-500k range, which allows plenty of room for Maxing mega backdoor Roth and ESPP. Outside of employers like this though, isn't this level of compensation more uncommon? I would think it would be hard for most savers to have enough spare income to allocate much more above and beyond the standard contribution limit, I've read even that is very uncommon
My posts are for entertainment purposes only.
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White Coat Investor
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Re: Why companies don't allow post-tax 401k contribution?

Post by White Coat Investor »

LmG7119 wrote: Mon Dec 31, 2018 12:40 pm I'm trying to work with my employer to allow post-tax 401k contribution. They use Principal which I'm not a big fan of.
How can I convince them? Did anybody do this with their employers?

Thanks
The answer to the question in the title is to pass the required testing. It's just easier to stick with a basic formula that will always pass testing rather than trying to maximize the benefits of the 401(k) for the employees, especially the high earning employees.

You can do what I did. Start your own company and give your employees the world's best 401(k). Heck, many of them even get a penalty I pay into their accounts each year when the plan doesn't pass testing.
Last edited by White Coat Investor on Thu May 30, 2024 12:01 am, edited 1 time in total.
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DefDetBen
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Re: Why companies don't allow post-tax 401k contribution?

Post by DefDetBen »

SnowBog wrote: Wed May 29, 2024 10:36 pm "Yes". In essence, they are effectively the same as "taxable" gains, where the length of the holding will determine if they are "short" (ordinary) or "long" (capital) gains - and thus which taxation rates apply.
I don't think that's true. The wiki says that earnings in the after-tax account are taxed as ordinary income. All the more reason to convert to Roth, of course.
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Re: Why companies don't allow post-tax 401k contribution?

Post by placeholder »

SnowBog wrote: Wed May 29, 2024 10:36 pm
"Yes". In essence, they are effectively the same as "taxable" gains, where the length of the holding will determine if they are "short" (ordinary) or "long" (capital) gains - and thus which taxation rates apply.
This is false the earnings for aftertax in a 401k are like those of nondeductible in an tira and that is ordinary income not capital gains of any type.
placeholder
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Re: Why companies don't allow post-tax 401k contribution?

Post by placeholder »

learning30 wrote: Wed May 29, 2024 10:52 pm Ok, so the earnings are taxed at capital gains rates got it.

That is good to know about all the specifics like that. Didn't consider that in my thinking!
No it's not good to know because that is 100% wrong.
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Re: Why companies don't allow post-tax 401k contribution?

Post by placeholder »

exodusNH wrote: Wed May 29, 2024 11:25 pm You can't Safe Harbor your way out of discrimination testing with after-tax contributions. Typically, only the highest-paid people will take advantage of them, making it difficult to pass the discrimination testing.
What megacorp did was have an overall percentage of salary that could be contributed which held down the amount going into aftertax for most people so the last few years before I retired it was 30% of salary.
loghound
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Re: Why companies don't allow post-tax 401k contribution?

Post by loghound »

My employer started allowing this about 3 or 4 years (fidelity manages it). You had to call fidelity to set up the roll over to the Roth 401k (which took about a 5 minute phone call) and then I. The 401k selection field you had to select an after tax percentage

The limit per year last year was something like $19,000 (in addition to normal 401k contributions). You actually could contribute to a 401k Roth directly and put around $40k total you income in a Roth account

The money was taxed as ordinary income so all of the tax discussions in previous threads should note that (and honestly doesn’t that make sense?)

It was poorly communicated and most of the people at work were not aware you could do it or why you should do it. I put together a PPT to explain the advantages but I don’t think many people ended up doing it…
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SnowBog
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Re: Why companies don't allow post-tax 401k contribution?

Post by SnowBog »

DefDetBen wrote: Thu May 30, 2024 12:01 am
SnowBog wrote: Wed May 29, 2024 10:36 pm "Yes". In essence, they are effectively the same as "taxable" gains, where the length of the holding will determine if they are "short" (ordinary) or "long" (capital) gains - and thus which taxation rates apply.
I don't think that's true. The wiki says that earnings in the after-tax account are taxed as ordinary income. All the more reason to convert to Roth, of course.
placeholder wrote: Thu May 30, 2024 12:51 am
SnowBog wrote: Wed May 29, 2024 10:36 pm
"Yes". In essence, they are effectively the same as "taxable" gains, where the length of the holding will determine if they are "short" (ordinary) or "long" (capital) gains - and thus which taxation rates apply.
This is false the earnings for aftertax in a 401k are like those of nondeductible in an tira and that is ordinary income not capital gains of any type.
Thank you for pointing out my mistake. :oops: I've attempted to edit my prior posts to clarify.

I think my original point remains valid though in that the entire benefit of an "after-tax" account is the conversion to Roth, aka the Mega Backdoor Roth. Leaving it in after-tax defeats that purpose... Convert early, convert often!

Correctly stating that there is no lower "long term capital gains" further reenforces that point.
cerequio
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Re: Why companies don't allow post-tax 401k contribution?

Post by cerequio »

LmG7119 wrote: Mon Dec 31, 2018 12:40 pm I'm trying to work with my employer to allow post-tax 401k contribution. They use Principal which I'm not a big fan of.
How can I convince them? Did anybody do this with their employers?

Thanks
We are a small employer and wanted to amend our plan to allow after tax contributions but learned that Ameritas/Blue Star simply doesn't allow it. So for us, it wasn't about additional cost. Then we learned that we would fail the additional testing anyway, so we gave up on it.
zeeke42
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Re: Why companies don't allow post-tax 401k contribution?

Post by zeeke42 »

We added this at my company thanks to me and another 401k committee member advocating it. The direct costs to the company were very small. We were already amending the plan for something else required, so the amendment marginal cost was either $0 or a few hundred bucks. Neither our recordkeeper nor payroll provider charged any extra for the additional category. The only concern on the company side was the non-discrimination testing. Our plan advisors ran the numbers and were confident we wouldn't fail or even come close.

However, whether or not adding MBDR will cause a discrimination testing issue is very company specific. We're a tech company that outsources almost all manufacturing and operations, so we pretty much only have high paid engineering and management employees. Participation is extremely high across the board. As of 2022, about 25% of my recordkeeper’s plans across all industries had after-tax contributions. In technology it’s 48%. It was interesting looking at the comparison of big tech plans. Amazon's numbers were a massive outlier because of their large non-tech workforce.
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Re: Why companies don't allow post-tax 401k contribution?

Post by learning30 »

placeholder wrote: Thu May 30, 2024 12:51 am
SnowBog wrote: Wed May 29, 2024 10:36 pm
"Yes". In essence, they are effectively the same as "taxable" gains, where the length of the holding will determine if they are "short" (ordinary) or "long" (capital) gains - and thus which taxation rates apply.
This is false the earnings for aftertax in a 401k are like those of nondeductible in an tira and that is ordinary income not capital gains of any type.
Thanks for clarifying!
5outof10
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Re: Why companies don't allow post-tax 401k contribution?

Post by 5outof10 »

White Coat Investor wrote: Thu May 30, 2024 12:00 am
LmG7119 wrote: Mon Dec 31, 2018 12:40 pm I'm trying to work with my employer to allow post-tax 401k contribution. They use Principal which I'm not a big fan of.
How can I convince them? Did anybody do this with their employers?

Thanks
The answer to the question in the title is to pass the required testing. It's just easier to stick with a basic formula that will always pass testing rather than trying to maximize the benefits of the 401(k) for the employees, especially the high earning employees.

You can do what I did. Start your own company and give your employees the world's best 401(k). Heck, many of them even get a penalty I pay into their accounts each year when the plan doesn't pass testing.
Maybe I missed it, but would you mind sharing who your plan is through?

And do you offer Roth 401(k)?

Thank you.
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Re: Why companies don't allow post-tax 401k contribution?

Post by dcabler »

Good luck with that. I worked for 8 different companies over my career and getting the benefits department to ever take a suggestion about a 401K plan was nearly impossible. When I dug deeply enough, it usually came down to the fact that they paid somebody to come up with the plan that they have and there's an assumption that the experts have done the right thing.

And so we ended up with plans with a bunch of high e/r funds, near-duplicate funds and the like. Very non-boglehead.

There was one company, however, that put together a team of employees that met a couple of times a year to review things and make recommendations.

Cheers.
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Re: Why companies don't allow post-tax 401k contribution?

Post by noraz123 »

learning30 wrote: Wed May 29, 2024 10:19 pm
noraz123 wrote: Mon Dec 31, 2018 5:44 pm I have been trying to get my employer to offer, and with the help of a coworker, we were able to convince them to make necessary changes this coming year.

Our company's 401k is with Fidelity. There are no ongoing costs associated with changing the plan to allow after tax contributions. However, I do believe that there are some nominal one time charges (~$5k) to ammend our plan.

The issue we've faced is that people in benefits weren't aware of what after tax contributions were, and it was hard to make any traction. Moreover, there's been turnover in the department, so any education and headway that we made previously was lost. Thankfully, the company hired a new person in benefits who has been quite helpful.

Thankfully, mega backdoor Roth IRA contributions are becoming more well-known and understood. It really is a low cost benefit that companies can offer if they are already offering a 401k.
My employer plan is also through Fidelity and I want to propose them to add this as an option. Curious, was this at a large or small company with the issues you had?
It was a small company, less than 2000 people.

As mentioned, it was a struggle to convince the company for a few reasons. First, nobody in Benefits was aware of what the mega backdoor Roth IRA was. It required a lot of education and handholding.

Second, because it was new, it wasn't something most people wanted to tackle. We thankfully had a new hire in benefits who wanted to learn more and assist.

I would imagine the struggles would be harder at larger companies.

I found it helpful to educate coworkers of the benefit and have them ask hr for the benefits.

The point you should hammer home with your benefits group is thst there is no additional ongoing costs.

Moreover, Fidelity is now an expert in the area. If you can push Benefits to talk with Fidelity, that may help assuage company's concerns of implementing it.
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Re: Why companies don't allow post-tax 401k contribution?

Post by toddthebod »

5outof10 wrote: Thu May 30, 2024 11:14 pm
White Coat Investor wrote: Thu May 30, 2024 12:00 am
LmG7119 wrote: Mon Dec 31, 2018 12:40 pm I'm trying to work with my employer to allow post-tax 401k contribution. They use Principal which I'm not a big fan of.
How can I convince them? Did anybody do this with their employers?

Thanks
The answer to the question in the title is to pass the required testing. It's just easier to stick with a basic formula that will always pass testing rather than trying to maximize the benefits of the 401(k) for the employees, especially the high earning employees.

You can do what I did. Start your own company and give your employees the world's best 401(k). Heck, many of them even get a penalty I pay into their accounts each year when the plan doesn't pass testing.
Maybe I missed it, but would you mind sharing who your plan is through?

And do you offer Roth 401(k)?

Thank you.
https://www.whitecoatinvestor.com/the-new-wci-401k/
zeeke42
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Re: Why companies don't allow post-tax 401k contribution?

Post by zeeke42 »

dcabler wrote: Fri May 31, 2024 5:36 am Good luck with that. I worked for 8 different companies over my career and getting the benefits department to ever take a suggestion about a 401K plan was nearly impossible. When I dug deeply enough, it usually came down to the fact that they paid somebody to come up with the plan that they have and there's an assumption that the experts have done the right thing.

And so we ended up with plans with a bunch of high e/r funds, near-duplicate funds and the like. Very non-boglehead.

There was one company, however, that put together a team of employees that met a couple of times a year to review things and make recommendations.

Cheers.
Things have improved somewhat. The experts these days are aware of the litigation risk of having a terrible plan. That doesn't help businesses too small to ever attract attention, but on the whole, plans are a lot better than they were 10-20 years ago.
dcabler
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Re: Why companies don't allow post-tax 401k contribution?

Post by dcabler »

zeeke42 wrote: Fri May 31, 2024 8:23 am
dcabler wrote: Fri May 31, 2024 5:36 am Good luck with that. I worked for 8 different companies over my career and getting the benefits department to ever take a suggestion about a 401K plan was nearly impossible. When I dug deeply enough, it usually came down to the fact that they paid somebody to come up with the plan that they have and there's an assumption that the experts have done the right thing.

And so we ended up with plans with a bunch of high e/r funds, near-duplicate funds and the like. Very non-boglehead.

There was one company, however, that put together a team of employees that met a couple of times a year to review things and make recommendations.

Cheers.
Things have improved somewhat. The experts these days are aware of the litigation risk of having a terrible plan. That doesn't help businesses too small to ever attract attention, but on the whole, plans are a lot better than they were 10-20 years ago.
No doubt. But I ran into this issue even more recently than then. The good news, at least in my case, is that many of the plans I had (even the bad ones) also offered a brokerage option. Having that off-ramp available ultimately allowed me to do exactly what I wanted to do in the way I wanted to do it. I was always told, however, that only a small percentage of employees actually used that option. Can't say I'm surprised by that, though.

Cheers.
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Re: Why companies don't allow post-tax 401k contribution?

Post by White Coat Investor »

5outof10 wrote: Thu May 30, 2024 11:14 pm
White Coat Investor wrote: Thu May 30, 2024 12:00 am
LmG7119 wrote: Mon Dec 31, 2018 12:40 pm I'm trying to work with my employer to allow post-tax 401k contribution. They use Principal which I'm not a big fan of.
How can I convince them? Did anybody do this with their employers?

Thanks
The answer to the question in the title is to pass the required testing. It's just easier to stick with a basic formula that will always pass testing rather than trying to maximize the benefits of the 401(k) for the employees, especially the high earning employees.

You can do what I did. Start your own company and give your employees the world's best 401(k). Heck, many of them even get a penalty I pay into their accounts each year when the plan doesn't pass testing.
Maybe I missed it, but would you mind sharing who your plan is through?

And do you offer Roth 401(k)?

Thank you.
I don't know if I can tell you here as the company that set it up is an advertiser on my website, but it sits at Fidelity. It's not a secret, I'm just trying not to run afoul of forum rules.

Of course it has Roth 401(k). And Mega Backdoor Roth. And 401(k) loans. And the ability to buy "self-directed" investments. And a spread of the best index funds. There's little reason not to get all the features allowed.
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Re: Why companies don't allow post-tax 401k contribution?

Post by learning30 »

noraz123 wrote: Fri May 31, 2024 7:31 am
learning30 wrote: Wed May 29, 2024 10:19 pm
noraz123 wrote: Mon Dec 31, 2018 5:44 pm I have been trying to get my employer to offer, and with the help of a coworker, we were able to convince them to make necessary changes this coming year.

Our company's 401k is with Fidelity. There are no ongoing costs associated with changing the plan to allow after tax contributions. However, I do believe that there are some nominal one time charges (~$5k) to ammend our plan.

The issue we've faced is that people in benefits weren't aware of what after tax contributions were, and it was hard to make any traction. Moreover, there's been turnover in the department, so any education and headway that we made previously was lost. Thankfully, the company hired a new person in benefits who has been quite helpful.

Thankfully, mega backdoor Roth IRA contributions are becoming more well-known and understood. It really is a low cost benefit that companies can offer if they are already offering a 401k.
My employer plan is also through Fidelity and I want to propose them to add this as an option. Curious, was this at a large or small company with the issues you had?
It was a small company, less than 2000 people.

As mentioned, it was a struggle to convince the company for a few reasons. First, nobody in Benefits was aware of what the mega backdoor Roth IRA was. It required a lot of education and handholding.

Second, because it was new, it wasn't something most people wanted to tackle. We thankfully had a new hire in benefits who wanted to learn more and assist.

I would imagine the struggles would be harder at larger companies.

I found it helpful to educate coworkers of the benefit and have them ask hr for the benefits.

The point you should hammer home with your benefits group is thst there is no additional ongoing costs.

Moreover, Fidelity is now an expert in the area. If you can push Benefits to talk with Fidelity, that may help assuage company's concerns of implementing it.
You have no idea how helpful your advice has been. I work for a large, major data company and last week I was able to get a meeting with our Chief HR Officer and she was not aware of what it was, but seemed to really like the idea of no ongoing costs and being able to use it as an incentive for employment offers. She has introduced me to our SVP of compensation, who I have an in-person meeting with next week. I am not sure if he knows what it is, but I would assume so considering he's been in corporate finance for decades.

I plan on my pitch being the no ongoing costs to the company, using it as an incentive for retention as well as for possible new hires. She mentioned that we are a 'preferred partner' or something with Fidelity, so I love what you're saying of on how they are an expert in this - which I absolutely believe they are.

One more question on a small piece I'm not sure I quite understand. For the pro-rata rule in an in-plan conversion, is the pre-tax I have already contributed in the past part of that equation? OR is it just the earnings that would accumulate on the "after-tax" contributions if it were to let grow before rolling over? I hope that makes sense.
placeholder
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Re: Why companies don't allow post-tax 401k contribution?

Post by placeholder »

learning30 wrote: Sun Jun 09, 2024 10:12 pm One more question on a small piece I'm not sure I quite understand. For the pro-rata rule in an in-plan conversion, is the pre-tax I have already contributed in the past part of that equation? OR is it just the earnings that would accumulate on the "after-tax" contributions if it were to let grow before rolling over? I hope that makes sense.
Most plans that use this have separate accounting of those amounts so either rollovers to external iras or in plan roth rollover are only concerned with the aftertax contributions and associated earnings.
learning30
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Re: Why companies don't allow post-tax 401k contribution?

Post by learning30 »

placeholder wrote: Mon Jun 10, 2024 12:27 am
learning30 wrote: Sun Jun 09, 2024 10:12 pm One more question on a small piece I'm not sure I quite understand. For the pro-rata rule in an in-plan conversion, is the pre-tax I have already contributed in the past part of that equation? OR is it just the earnings that would accumulate on the "after-tax" contributions if it were to let grow before rolling over? I hope that makes sense.
Most plans that use this have separate accounting of those amounts so either rollovers to external iras or in plan roth rollover are only concerned with the aftertax contributions and associated earnings.
Thank you!
zeeke42
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Re: Why companies don't allow post-tax 401k contribution?

Post by zeeke42 »

placeholder wrote: Mon Jun 10, 2024 12:27 am
learning30 wrote: Sun Jun 09, 2024 10:12 pm One more question on a small piece I'm not sure I quite understand. For the pro-rata rule in an in-plan conversion, is the pre-tax I have already contributed in the past part of that equation? OR is it just the earnings that would accumulate on the "after-tax" contributions if it were to let grow before rolling over? I hope that makes sense.
Most plans that use this have separate accounting of those amounts so either rollovers to external iras or in plan roth rollover are only concerned with the aftertax contributions and associated earnings.
Yeah, the after tax contributions are a separate bucket. The pro-rata rule is only an IRA issue, not one for post tax 401k.
CuriousGeorgeTx
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Re: Why companies don't allow post-tax 401k contribution?

Post by CuriousGeorgeTx »

Megacorp’s 401k included the option to make tax-paid contributions, including the ability to make a large special contribution annually. It enabled me to do a mega backdoor Roth and, more importantly, to have enough tax paid funds in the 401k to NUA (Net Unrealized Appreciation) a lot of my low cost employer stock out of the 401k without having to pay any income tax. And I donated that stock to a DAF, so I never had to pay tax on the gain.

I think Megacorp offered it because our industry had a lot of highly compensated employees who easily maxed out their tax deferred contributions and allowing tax paid contributions allowed the employees to put more in the 401k. But I don’t know for sure. The plan was administered by Voya when I retired, but I’m sure they did what Megacorp told them to do.

So I’m validating your desire for the feature. As to how to get your company to offer it? Convince a senior executive that it would benefit them and have them push HR. HR can ignore most employees. You need to find one they can’t ignore.

Good luck.
zeeke42
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Re: Why companies don't allow post-tax 401k contribution?

Post by zeeke42 »

CuriousGeorgeTx wrote: Wed Jun 12, 2024 6:50 pm So I’m validating your desire for the feature. As to how to get your company to offer it? Convince a senior executive that it would benefit them and have them push HR. HR can ignore most employees. You need to find one they can’t ignore.
Another potentially helpful person to get on your side for improving plans is the head of recruiting. It might not help for less well known things like mega-backdoor-roth, but for improving things like fund fees and company match, it definitely can.
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