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Megabackdoor Roth

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  • Avatar newinvestor 
    Participant
    Status: Physician
    Posts: 25
    Joined: 01/24/2016

    Our practice has a 401k account with a 4 percent employer match. I am one of the relatively new owners and tried with my admin to add the provision for non Roth after tax (NRAT) with in plan Roth conversion and the TPA told our practice administrator that we can do it but it will make the 401k account top heavy with contributions mainly from the highly compensated employees and in order to get around it, the practice has to do a 7 percent employer match. I was wondering if there are any other ways to get around it. Thanks in advance.

    #233836 Reply
    Craigy Craigy 
    Participant
    Status: Spouse
    Posts: 2052
    Joined: 09/16/2016

    Find a non-HCE to participate with you šŸ˜‰

    LEVEL 1 WCI FORUM MEMBER.

    #233837 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2374
    Joined: 03/01/2018

    there is no getting around it, the plan has to pass the ACP and ADP tests for nondiscrimination, and there is no safe harbor provision for after tax contributions

    you could strive to become an owner, then you get to control profit sharing and make those kinds of decisions, in terms of maximizing contributions for owners weighed against the cost of employer contributions to employees

    or you could go on a crusade to educate employees on the benefits of saving for retirement and how a mega backdoor Roth provision could work, depends on the demographics of the practice, how the owners would feel about this, how it would make you look, etc

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

    #233843 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1903
    Joined: 02/01/2016

    I’m not sure what the TPA is stating as the reason is correct.

    Top heavy testing only involves the ratio of 401k plan assets (not contributions) of key employees to total plan assets. Increasing the employer match would also increase their plan assets. For top heavy testing, key employees are defined as:

    • Company officer making over $175,000
    • Person who owns 5 percent or more of the business
    • Employee who owns more than 1 percent of the business and makes over $150,000

    It is far more likely that it is ACP testing that will fail. This can be mitigated by limiting the HCE contribution percentageĀ and/or @craigy‘s suggestion.

    #233849 Reply
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    Avatar newinvestor 
    Participant
    Status: Physician
    Posts: 25
    Joined: 01/24/2016

    Thanks everyone for your responses. @jacoavluĀ I am one of the relatively new owners and if we want to go through the profit sharing route for maximising pretax dollars, can we still do it when not all the owners ( esp the older ones) do not contribute to 401k plan. If I have to show my administrator stuff to present to TPA about it, any references?

    #233855 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2374
    Joined: 03/01/2018

    yes, it is allowed that not all owners have to participate or participate to some equal degree or get the same profit sharing in the plan. Whatever profit sharing contributions do happen among owners/HCEs are subject to testing. You should try to figure out who among owners is interested in maxing out the plan, then get projections to the TPA and have them run the scenario to see how it would affect testing and necessary employer contributions for non HCEs

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

    #233867 Reply
    Liked by newinvestor
    Avatar HumbleInvestor 
    Participant
    Status: Physician, Small Business Owner
    Posts: 207
    Joined: 12/28/2016

    @spirtrider, I thought any one making over 120k is considered HCE for testing. Am I mistaken?

    Also how will having a non HCE participation help with Mega backdoor Roth?

    #233914 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2374
    Joined: 03/01/2018

    @spirtrider, I thought any one making over 120k is considered HCE for testing. Am I mistaken?

    Also how will having a non HCE participation help with Mega backdoor Roth?

    Click to expand…

    yes an HCE is >120k for 2019.

    not all HCEs are key employees.

    after tax contributions and employer matching/profit sharing contributions are subject to ACP testing

    because the ACP test compares the average contribution rate for HCEs vs NHCEs, if an HCE (such as the OP) makes after tax contributions, this will increase the average contribution rate among HCEs which may result in a failure of the ACP test. So to be able to make after tax contributions and have the plan pass testing, the OPs business would also need NHCEs to make after tax contributions.

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

    #233917 Reply
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    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1903
    Joined: 02/01/2016

    @humbleinvestor, my post was about the definition of “key employees” for top heavy testing that the OP said the TPA gave as a reason. As I pointed out and clarified by @jacoavlu, HCE/NHCE status is used for ADP/ACP testing.

    #233918 Reply
    Avatar HumbleInvestor 
    Participant
    Status: Physician, Small Business Owner
    Posts: 207
    Joined: 12/28/2016

    @spiritrider @jacoavlu thanks for the clarification.

    #233926 Reply
    Craigy Craigy 
    Participant
    Status: Spouse
    Posts: 2052
    Joined: 09/16/2016

    You will be hard-pressed to find a non-HCE that makes after-tax contributions.

    Unless you come across a doctor’s wife like me, of course.

    LEVEL 1 WCI FORUM MEMBER.

    #234591 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1903
    Joined: 02/01/2016

    Surprisingly a non-insignificant number of plans with employee after-tax contributions and in-service rollovers, pass ACP testing. That only happens with significant NHCE employee after-tax contributions.

    #234779 Reply
    Avatar newinvestor 
    Participant
    Status: Physician
    Posts: 25
    Joined: 01/24/2016

    Our administrator acknowledged that he rather than the TPA used the word top heavy in error ( thanks @spiritrider) and the TPA meant only that if non HCE employees may not contribute after tax money ( which is likely the case given the fact that currently not a lot of non HCE employees contribute any more than the minimum required to get the full 4 percent employer matching) and the only way to get around is to make the employer match 7 percent which will also incentivize the non HCE employees to contribute more. I was of the opinion that after tax money equals $56000 – ( employee portion which is $19,000 + employer match which is currently 4 percent for us). @spiritrider, can we limit the after tax contribution contribution percentage and if so how do we calculate how much percent to contribute?

    #234876 Reply

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