new 401k plan, want to make it mega back door roth friendly

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calabel
Posts: 6
Joined: Fri Sep 15, 2017 4:14 pm

new 401k plan, want to make it mega back door roth friendly

Post by calabel » Wed Nov 07, 2018 6:29 pm

My SO recently switched jobs and joined a small new company at it's founding. SO has been given the green light to determine what the new firm will do for their 401k plan. We naturally would like to make sure that we do everything possible to make it maximally mega back door Roth ira friendly, and we'd like to move on setting things up ASAP so that there's a chance to get a meaningful contribution done in 2018.

A few questions:

1) Does anyone have experience with setting up a non-solo 401k plan that allows non-Roth after-tax contributions, tracks those contributions separately, and allows for in-service distributions?

2) Any tips or resources on the subject of which custodians make the process particularly easy or difficult to execute?

3) Is there anything else of importance that should be taken into account?


EDIT: added some details as requested by posters downthread--

This is a small professional services firm of ~20 people. 3/4 are very highly compensated and 1/4 are support staff that are going to come in below (and some well below) the HCE thresholds.

The firm is likely to add more professionals at a nice clip, and the support staff ratio will likely stay similar or go down slightly.
Last edited by calabel on Thu Nov 08, 2018 8:09 pm, edited 3 times in total.

badger42
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Joined: Thu Apr 09, 2015 9:01 am

Re: new 401k plan, want it to make mega back door roth friendly

Post by badger42 » Wed Nov 07, 2018 6:33 pm

2) The two plans I've had with Mega-Backdoor have been with Vanguard and Fidelity as custodians, respectively.

3) The after-tax contributions count towards your highly compensated employee / top-heavy tests. Unless everybody is highly paid, it's unlikely you will pass those tests without a safe harbor plan (which requires a specific level of matching).

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: new 401k plan, want it to make mega back door roth friendly

Post by Spirit Rider » Wed Nov 07, 2018 8:18 pm

badger42 wrote:
Wed Nov 07, 2018 6:33 pm
2) The two plans I've had with Mega-Backdoor have been with Vanguard and Fidelity as custodians, respectively.

3) The after-tax contributions count towards your highly compensated employee / top-heavy tests. Unless everybody is highly paid, it's unlikely you will pass those tests without a safe harbor plan (which requires a specific level of matching).
Fidelity and Vanguard do not offer 401k plan administration to small companies

A safe harbor 401k plan only exempts employee elective and employer contributions from anti-discrimination testing. Employee after-tax contributions are still subject to ACP testing.

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: new 401k plan, want it to make mega back door roth friendly

Post by Spirit Rider » Wed Nov 07, 2018 8:20 pm

OP, you need to tell us how many employees does/will the company have in the near term.

badger42
Posts: 292
Joined: Thu Apr 09, 2015 9:01 am

Re: new 401k plan, want it to make mega back door roth friendly

Post by badger42 » Thu Nov 08, 2018 9:48 am

Spirit Rider wrote:
Wed Nov 07, 2018 8:18 pm
badger42 wrote:
Wed Nov 07, 2018 6:33 pm
2) The two plans I've had with Mega-Backdoor have been with Vanguard and Fidelity as custodians, respectively.

3) The after-tax contributions count towards your highly compensated employee / top-heavy tests. Unless everybody is highly paid, it's unlikely you will pass those tests without a safe harbor plan (which requires a specific level of matching).
Fidelity and Vanguard do not offer 401k plan administration to small companies

A safe harbor 401k plan only exempts employee elective and employer contributions from anti-discrimination testing. Employee after-tax contributions are still subject to ACP testing.
Not only do we need to know the employees, we need to have some idea what the mix looks like (approximately). Are we talking software engineers or bricklayers? Otherwise ACP testing is likely to be the blocker for any substantial after-tax / mega-backdoor offering.

calabel
Posts: 6
Joined: Fri Sep 15, 2017 4:14 pm

Re: new 401k plan, want to make it mega back door roth friendly

Post by calabel » Thu Nov 08, 2018 1:25 pm

Thanks everyone that's responded so far! I've edited the OP to include some basic firm size and staff breakdown details.

My current understanding is that a safe harbor 401k solves most problems for HCEs. The major exception is that non-Roth after tax contributions (which are the key to the mega backdoor Roth) subject a safe harbor plan to top heavy testing.

calabel
Posts: 6
Joined: Fri Sep 15, 2017 4:14 pm

Re: new 401k plan, want to make it mega back door roth friendly

Post by calabel » Wed Nov 14, 2018 12:28 pm

We've done some rough modeling of contribution rates for both the professional and support staffs. At the risk of oversimplification and with the caveat that we may not fully be calculating all of the tests accurately at this stage, it does seem that worthwhile after tax contributions should be on the table. If the professional staff properly appreciates the tax benefits, this should be an easy sell!

At this stage, a few additional questions:

1) Thanks to Spirit Rider for confirming that employee after-tax contributions are subject to ACP testing! How is this calculated in practice? Do contributions that would otherwise be covered by a safe harbor plan get ignored, or does the act of making employee after-tax contributions subject all plan contributions (even if the pre-tax would otherwise be covered by the safe harbor) to ACP testing?

2) Are there any good online calculators that you'd recommend for testing? We'll ultimately probably make our own model in Excel so that we can vary the assumptions of contributions made by each individual person (since we actually know something about each person and their likelihood to contribute), but it is great to look at existing resources as a way to verify that your own model is functioning properly.

3) We need to finding a custodian that will offer what we need given that the major players won't work with small companies. My SO has calls out to a few providers already, but if there's some existing experience to show that a given provider will offer what we're looking for that would be excellent intel.


Anything else we're missing?

Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: new 401k plan, want to make it mega back door roth friendly

Post by Spirit Rider » Wed Nov 14, 2018 11:15 pm

  1. The relevant IRS regulation is 26 CFR 1.401(m)-2 - ACP test. My eyes glaze over trying to read and understand this, but I think employer contributions and employee after-tax contributions are combined.
  2. I am not aware of any online ACP testing resources.
  3. Small local TPAs may be your best bet. I'm not sure about Employee Fiduciary and you might check out Ascensus.

jacoavlu
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Re: new 401k plan, want to make it mega back door roth friendly

Post by jacoavlu » Thu Nov 15, 2018 12:33 am

Lots of HCEs. Are they all partners / owners? How Much money are we talking for HCEs?

Are you sure you want to focus so much on after tax and mega backdoor Roth? How about lots of profit sharing instead? You can always do Roth elective deferrals to have a mix of pretax and Roth. What’s your marginal tax rate going to be? If >24% I would absolutely favor pretax than after tax.

You may even inquire about a safe harbor profit sharing plan that will get HCEs to the annual addition limit. With an added feature of in plan Roth rollover. That’s a thing in custom solo 401ks, I guess I’m not sure if it’s doable in a group plan. It’s another form essentially of the mega backdoor Roth. Without the IRA part.

calabel
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Joined: Fri Sep 15, 2017 4:14 pm

Re: new 401k plan, want to make it mega back door roth friendly

Post by calabel » Sat Nov 17, 2018 7:55 pm

Some of the HCEs are partners/owners, others aren't. Maybe this is misguided, but here's my thinking on the profit sharing approach:

Profit sharing is an option, but I assume that the owners won't want to share that much profit with the non-owners. More importantly, I suspect they won't all necessarily want to lock up the maximum 54k annually in a retirement account for themselves (some are not the most prudent about saving), whereas we are very interested in maxing out our savings hence the desire to make it an employee-elected deferral.

jacoavlu
Posts: 580
Joined: Sun Jan 06, 2013 12:06 pm

Re: new 401k plan, want to make it mega back door roth friendly

Post by jacoavlu » Sat Nov 17, 2018 9:23 pm

Is your SO an HCE?

If so, my rudimentary understanding is that the plan will have difficulty passing testing unless you also have non HCEs contributing after tax

You need someone to run plan design and advise whether your plan is feasible. If plan testing fails then your after tax contributions just get returned to you.

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