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Mega Backdoor Roth Question

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  • Avatar Western wolf 
    Participant
    Status: Physician
    Posts: 18
    Joined: 03/08/2016

    In 2018 I was able to use the “Mega Backdoor Roth” strategy to add 9,000 dollars (in addition to 5,500 via backdoor roth) to my Roth IRA.

    I was recently on NetBenefits looking at my 401K contribution settings and noticed that I no longer have the option of putting money in my 401K as after tax, non roth money.  Essentially this means I will no longer be able to take advantage of the Mega Backdoor Roth.

    I contacted HR with my employer and was told that they had to cancel this option because “we did not pass our non-discrimination testing b/c it made the plan favor the highly compensated.”

    Just curious if anyone has had similar experiences or knows any alternative options that might be available to continue to fund a mega backdoor roth??

    Thanks!

     

    #179328 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1998
    Joined: 03/01/2018

    This happens. My understanding is that aftertax employee contributions are subject to the ACP test — if few or no Non-Highly Compensated participants take advantage of this feature, the test would fail every year. Which can mean your contribution would have to be refunded to you. There is no Safe Harbor plan design for aftertax contributions.

    If you had self employment income you could adopt a solo 401k for that income and execute a mega backdoor Roth.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #179332 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2126
    Joined: 06/24/2016

    This happens. Sucks when it does. Unfortunately, the people who need these benefits the most (NHCEs) fail to make use of them. My wife lost her dependent care FSA for this last year.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #179334 Reply
    ChadCFP ChadCFP 
    Participant
    Status: Financial Advisor, Website Sponsor, Small Business Owner
    Posts: 76
    Joined: 10/04/2017

    Yea, this is always a bummer. And yes, it happens more often than we would like. At least you had the chance for one year, many plans don’t even offer this option!

    This is not a fix, but if you are married, you have the option to do a backdoor Roth IRA for your spouse as well ($6,000 for 2019). You seem well versed in financial literacy, but I thought I would throw that one out there just in case.

    Also, not sure what type of hospital you are apart of but make sure you don’t have a 403b and/or 457b available to you. While the 403b and 401k are on the same island, the 457b is on a separate island for an extra $19,000 (2019).

    Chad Chubb, CFP ® | WealthKeel LLC
    https://wealthkeel.com/wci | Gen X & Gen Y Physicians

    #179367 Reply
    Avatar jhwkr542 
    Participant
    Status: Physician
    Posts: 1142
    Joined: 02/15/2016

    Not only is this not uncommon, but it’s also the main reason most plans don’t do it in the first place.

    #179390 Reply
    Craigy Craigy 
    Participant
    Status: Spouse
    Posts: 1907
    Joined: 09/16/2016

    Your employer needs to fire all the non HCEs.

    LEVEL 1 WCI FORUM MEMBER.

    #179397 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1750
    Joined: 02/01/2016

    If you were an HCE for 2018 purposes, there may be another shoe to drop. If the plan failed ACP testing on after-tax contributions, HCEs may have a portion of their after-tax contributions and any earnings returned to them.

    This must be done by the plan by 3/15. Very often the first indication of this is receiving a check and explanation. You might want to call HR again to get a heads up.

    #179405 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1998
    Joined: 03/01/2018

    ^^^
    And another complicating factor. The OP indicated the funds ended up in their Roth IRA. Not in plan Roth roll over.

    If the after-tax contributions have already been rolled out to a Roth IRA, how can the plan possibly return the funds?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #179463 Reply
    Avatar Western wolf 
    Participant
    Status: Physician
    Posts: 18
    Joined: 03/08/2016

    ^^^
    And another complicating factor. The OP indicated the funds ended up in their Roth IRA. Not in plan Roth roll over.

    If the after-tax contributions have already been rolled out to a Roth IRA, how can the plan possibly return the funds?

    Click to expand…

    I’m wondering the same thing.  They would either have to take the money from my Roth IRA which is a completely different plan (same custodian but just as easily could have been different) or from my 401K but any money remaining in the 401K would have come in as a different contribution type (employee deferral instead of after tax non roth).

    I’ll ask HR and see what they say.

    It sure would be a huge disappointment to receive that check in April!

    Has anyone experienced something like this?

     

     

    #179470 Reply
    Avatar SLC OB 
    Participant
    Status: Physician
    Posts: 456
    Joined: 06/23/2018
    Has anyone experienced something like this?

    Click to expand…

    No… but we did a mega-backdoor roth for my husband and now I am getting worried that this could happen to him!  I’ll have to check the NetBenefits for him.

    #179476 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1998
    Joined: 03/01/2018

    Such circumstances have been discussed quite a bit on bogleheads. I think I read a post there by Alan S. once that described what happened when a return from a Roth IRA was required. I don’t think there’s penalty involved. @spiritrider likely knows

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #179478 Reply
    Liked by SLC OB
    nachos31 nachos31 
    Moderator
    Status: Physician
    Posts: 421
    Joined: 01/12/2016

    What does non-discrimination testing look like? Are they looking for percentage of HCE vs NHCE who contrib and there must be a certain ratio? Amounts contrib by HCE vs NHCE? Certain minimum percentage of NHCE utilizing? Something else?

    in order to meet safe harbor provisions, my wife’s 403b plan had to get rid of their true up for the employer match and force everyone to contribute each pay period to secure the match. That’s more of a nuisance but it’d be interesting to learn more about non-discrimination and saw harbor, etc. Anyone have good resources? Cue DMFA or spiritrider posting an IRS publication.

    #179502 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1998
    Joined: 03/01/2018

    https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-the-plan-failed-the-401k-adp-and-acp-nondiscrimination-tests

    This page has some info. You’ll also find info on Employee Fiduciary’s blog. It’s actuarial stuff. I know very little.

    If an employer adopts a safe harbor plan then I believe the plan automatically passes the ACP/ADP and top heavy tests, but if discretionary profit sharing contributions or after tax contributions are made then testing again applies. There are other instances where testing also applies. There is also a “general test”

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #179521 Reply
    Avatar jhwkr542 
    Participant
    Status: Physician
    Posts: 1142
    Joined: 02/15/2016

    What does non-discrimination testing look like? Are they looking for percentage of HCE vs NHCE who contrib and there must be a certain ratio? Amounts contrib by HCE vs NHCE? Certain minimum percentage of NHCE utilizing? Something else?

    in order to meet safe harbor provisions, my wife’s 403b plan had to get rid of their true up for the employer match and force everyone to contribute each pay period to secure the match. That’s more of a nuisance but it’d be interesting to learn more about non-discrimination and saw harbor, etc. Anyone have good resources? Cue DMFA or spiritrider posting an IRS publication.

    Click to expand…

    Here’s a pretty good website with the calculations.  It’s based on % of salary for each employee and then that employee’s % is put in the NHCE or HCE group.  These calculations are done for both employEE deferrals and employER contributions (ADP and ACP, respectively).  I believe that after-tax contributions fall into the latter category which will mess up ACP testing.

    http://www.consultrms.com/Resources/43/Nondiscrimination-Testing/76/Understanding-ADP-and-ACP-Testing

    Or straight from the horse’s mouth:  https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-the-plan-failed-the-401k-adp-and-acp-nondiscrimination-tests

    #179557 Reply

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