Mega backdoor Roth not available to HCE?

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Jules4
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Mega backdoor Roth not available to HCE?

Post by Jules4 » Mon Sep 23, 2019 12:24 pm

My husband and I own a business with two full time employees. We set up a 401k with Voya 14 years ago. We had a safe harbor plan to maximize our contribution without highly compensated employee problems. Now that our two employees are in the plan it is too expensive to continue the safe harbor portion.

I am assuming we would have the same HCE problem to do a mega backdoor Roth. Am I correct?

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whodidntante
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Re: Mega backdoor Roth not available to HCE?

Post by whodidntante » Mon Sep 23, 2019 12:25 pm

There is a good chance of it, yes.

Spirit Rider
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Re: Mega backdoor Roth not available to HCE?

Post by Spirit Rider » Mon Sep 23, 2019 5:19 pm

Yes, employee after-tax contributions are subject to ACP testing even if you have a safe harbor plan.

There maybe another option other than terminating your 401k plan. How much are the Voya 401k administrative fees and how good are the investment options and expense ratios. You could look into Guideline.com. They charge only $39/month base fee + $8/month/employee for most payroll providers. They offer Vanguard low cost index funds, some Vanguard low cost active funds and some DFA funds.

JBTX
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Re: Mega backdoor Roth not available to HCE?

Post by JBTX » Mon Sep 23, 2019 7:24 pm

Jules4 wrote:
Mon Sep 23, 2019 12:24 pm
My husband and I own a business with two full time employees. We set up a 401k with Voya 14 years ago. We had a safe harbor plan to maximize our contribution without highly compensated employee problems. Now that our two employees are in the plan it is too expensive to continue the safe harbor portion.

I am assuming we would have the same HCE problem to do a mega backdoor Roth. Am I correct?
So you had a safe harbor plan, but the only way it was affordable is if your 2 employees didn't participate. Now that they choose to participate, you are taking away the match, which is at most 4% of their salaries?

I'd be inclined to find another path. Offering a benefit and then taking it away as soon as they use it is...well not a good look.

If you wanted to tax defer a lot more, and only put in a little more, a profit share could be an Option?

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Jules4
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Re: Mega backdoor Roth not available to HCE?

Post by Jules4 » Tue Sep 24, 2019 12:01 pm

We still match our employees contributions. When we had a safe harbor, the employer contribution was 3 times what the employee contributed. So 9% of employee compensation. I wouldn’t have minded that either, the employees are great employees, but at the paycheck to paycheck level of thinking and they didn’t really “see” that money at all. It wasn’t having a positive effect on employer/employee relationships.

We actually didn’t know the safe harbor plan was set up that way until we were required to contribute that much. I think we are being very standard in our plan now and were being way above standard with our safe harbor.

The safe harbor plan didn’t allow us as hce to put in any more money than doing a tIRA on top of 401k would. It might have been beneficial if we made more money. I didn’t know we would be eligible for tIRA in addition to 401k then either, but we would have.

We have gotten more really horrendous accounting advice than I ever thought possible. I am trying to learn more on my own and appreciate bogleheads.

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Jules4
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Re: Mega backdoor Roth not available to HCE?

Post by Jules4 » Tue Sep 24, 2019 12:07 pm

Oh, we didn’t terminate our 401k. We just eliminated the safe harbor part of it. Voya’s Fee is 1% I think. Not horrible. We have most of our money in a guaranteed 3% account. Won’t stay ahead of inflation, but we won’t lose it either. No new money is guaranteed 3%. That ended last year. We are looking for low expense ratio equities in the plan to invest last year’s and this year’s contribution to.

Spirit Rider
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Re: Mega backdoor Roth not available to HCE?

Post by Spirit Rider » Tue Sep 24, 2019 2:03 pm

If you make 401k contributions or have 401k contributions made on you behalf. You are an active participant in an employer retirement plan. There is a traditional IRA income deduction limit. For 2019, your deduction is phased out from $193K - $203K MFJ MAGI.

I don't know what type of safe harbor plan Voya had you set up in. The minimum employer match is 100% match of the first 3% of compensation and 50% match of the next 2% of compensation. For maximum match of 4% on 5% of compensation. Alternatively the minimum non-elective contribution is 5% of compensation.

You really should investigate Guideline. The now offer a "new comparability" method of profit sharing. The only costs $99/month and $8/month/employee. There are no AUM fees.

New comparability profit sharing could allow you to have a safe harbor plan with ~5% - 6% profit sharing and possibly allow you and your husband to make the full employee elective contribution and max out the annual addition limit with employer contributions.

nolesrule
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Re: Mega backdoor Roth not available to HCE?

Post by nolesrule » Tue Sep 24, 2019 2:15 pm

Eliminating the Safe Harbor could probably lead to ADP testing failure if the employees are only deferring 3%.

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Jules4
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Re: Mega backdoor Roth not available to HCE?

Post by Jules4 » Tue Sep 24, 2019 7:35 pm

Guideline is certainly cheaper. What would be better about guideline than Vanguard? We never switched from Voya because we liked the 3% guaranteed fund. Vanguard didn’t have anything like that although a 2% money market fund with vanguard without a 1% fee would be comparable.

Voya didn’t set up our 401k. Our plan administrators did, Goodman, Hughes, Dixon. I think they are national but I could be wrong. It had a profit sharing portion too. I forgot about that.

We have always just contributed what we are told by Goodman we can based upon what everyone makes that won’t break any rules. With our old plan, it was always around 60k for both of us even when our income seemed to vary a lot. I could never figure that out. We are above 50 and will probably just put in the max, 49,000 for both of us for 2018. We filed an extension for 2018 so I don’t know exactly yet. I didn’t realize we could still contribute to a tIRA also until recently, so too late for 2018. Our AGI should let us do that. Goodman certainly never mentioned that we could.

nolesrule
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Re: Mega backdoor Roth not available to HCE?

Post by nolesrule » Tue Sep 24, 2019 7:42 pm

Assuming your employees really are only deferring 3% of their salaries as was implied by your comment about the 9% being 3x their contributions, I believe you'll be limited to 5% of salary + over-50 catch-up as an employee deferral, and then whatever matching and profit-sharing your plan still has in place.

jacoavlu
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Re: Mega backdoor Roth not available to HCE?

Post by jacoavlu » Tue Sep 24, 2019 8:46 pm

I would second Spirit Rider’s recommendation to contact Guideline. They can run a free projection for you based on your business demographics and compensation and tell you how much it would cost you in employer contributions to get to the annual addition limit for HCEs with profit sharing using a New Comparability plan.

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Jules4
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Re: Mega backdoor Roth not available to HCE?

Post by Jules4 » Wed Oct 09, 2019 1:41 pm

When I first got the recommendation about guideline, I didn't understand which function Guideline would take over. I think I know now that they would take over the third party administrator role that Goodman, Dixon and Hughes now does, and the part that Voya does, but I'm still not sure.

It was my understanding that we could go directly through Vanguard to do our 401K, which I wish we had done from the beginning.

Are you saying that Guideline would be better than using Vanguard? Is that because Vanguard uses Acensus as TPA and they aren't that great? When we called Vanguard about using them directly instead of Voya, they didn't mention a different TPA. I assumed we could use the same TPA, but I didn't ask specifically.

Sorry if I sound dense. I have twins who just turned 4 and I haven't slept in about 4 1/2 years. I used to be intelligent.

Maybe this should be a new thread? I didn't want to switch because of the background info already here.

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