Why employer caps after-tax 401(K)?

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my2p
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Joined: Sun Nov 02, 2014 9:32 pm

Why employer caps after-tax 401(K)?

Post by my2p »

I am happy that my employer is offering after-tax 401(K) contributions with Roth in-plan conversion (Fidelity). But they cap it at $10k/year and I can contribute to that only after maxing out the pre-tax or Roth 401(K). So, my own contribution can only be a max of $23K (I do pre-tax), plus $10K in after-tax. Their contribution is max. 4% of my salary, but that will be added only next year (based on profit sharing). All the contributions put together won't come close to $69k.

While I am happy that after-tax is available, just wonder why an employer would cap the after-tax contribution?

(I know I can try asking my HR, but many of them are not that informed.)
“The simple path to wealth” — JL Collins.
placeholder
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Joined: Tue Aug 06, 2013 12:43 pm

Re: Why employer caps after-tax 401(K)?

Post by placeholder »

Compliance testing concerns see this thread: viewtopic.php?t=408789
lakpr
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Joined: Fri Mar 18, 2011 9:59 am

Re: Why employer caps after-tax 401(K)?

Post by lakpr »

+1 to @placeholder's response. My employer also limits the max after-tax contributions to 5% of the salary or $10k, whichever is *LOWER*. The after-tax contributions to 401(k) are subject to ACP and ADP testing, EVEN IN SAFE HARBOR PLANS.
Dottie57
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Re: Why employer caps after-tax 401(K)?

Post by Dottie57 »

My employer never allowed after tax contributions- period to plain 401k.
placeholder
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Joined: Tue Aug 06, 2013 12:43 pm

Re: Why employer caps after-tax 401(K)?

Post by placeholder »

We had a cutoff at megacorp which I found out after discovering the mega backdoor and the plan admin told me about the compliance testing.
stevethefundguy
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Joined: Sat Jun 02, 2007 10:20 pm

Re: Why employer caps after-tax 401(K)?

Post by stevethefundguy »

Yes, compliance testing to ensure that the plan does not disproportionately benefit highly compensated employees.
To be fair, 401(k)s were intended to help average workers save for retirement, not to be another way for high earners to build giant accounts that are shielded from taxes. (I realize that, in this case, the contributions at issue would go to an after-tax account, but going forward that money will be "Roth-ized" and grow tax-free, with no taxes owed on the gains.)
Makefile
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Joined: Fri Apr 22, 2016 11:03 pm

Re: Why employer caps after-tax 401(K)?

Post by Makefile »

stevethefundguy wrote: Thu Jun 13, 2024 4:28 pm To be fair, 401(k)s were intended to help average workers save for retirement, not to be another way for high earners to build giant accounts that are shielded from taxes.
Based on what I know about the history of 401(k)s, it was actually the other way around, originally. The nondiscrimination tests were only introduced in the mid-1980s as a compromise when it was dicey as to whether 401(k)s would continue at all. There were other reforms at the same time including a big reduction in the contribution limits, and application of FICA and Medicare to employee deferrals that didn't apply before.
avalpert1
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Re: Why employer caps after-tax 401(K)?

Post by avalpert1 »

stevethefundguy wrote: Thu Jun 13, 2024 4:28 pm Yes, compliance testing to ensure that the plan does not disproportionately benefit highly compensated employees.
To be fair, 401(k)s were intended to help average workers save for retirement, not to be another way for high earners to build giant accounts that are shielded from taxes. (I realize that, in this case, the contributions at issue would go to an after-tax account, but going forward that money will be "Roth-ized" and grow tax-free, with no taxes owed on the gains.)
What ever gave you the idea that was what they were intended for?
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