PLANADVISER - July/August 2022 - 30

plan design / after-tax contributions
Brog and his team look at that plan's census data to project
the testing results if it does begin allowing these contributions.
" Our experience is that these plans would not pass
the nondiscrimination testing, " he says. " There is much
discussion, and 'smart' online posts about it, but there
are very few plans-in our experience-with the demographics
to pass the tests to allow the adoption of after-tax
contributions. "
If a plan can add this feature and pass nondiscrimination
testing, it is a wonderful benefit for participants able to
use it, Feinschreiber says. " But it's not always possible for an
employer to offer an after-tax 401(k) savings option, or, if a
plan does offer it, the money participants can put aside may
be limited, " he says.
To pass testing, the highly compensated participants
in a plan may contribute an average of no more than 2%
above the average contributions of non-highly compensated
participants. " And who will be making these after-tax
owner also advocates, alongside employees, for the plan and
encourages them to meet with Wagstaff & Crawford.
" Non-highly compensated employees in this plan already
are saving at a high rate, so it raises the floor for nondiscrimination
testing, " Brog says, referring to the 2% allowable
difference between the average contributions of each group.
So HCEs may contribute more, without testing problems.
" An adviser who wants to be proactive with clients may
look for these characteristics in a plan, " Brog continues.
" It's probably a better way of approaching the idea of aftertax
contributions, instead of approaching every client. I'd
suggest identifying the employers that this could work well
for first, and then approach the plan sponsor. "
The Appeal of Mega-Backdoor Roths
... in a plan permitting after-tax contributions,
a participant under age 50 who contributes
$20,500 and receives $10,250 in an employer
match could then save another $30,250-
assuming there are no plan-testing
complications-in after-tax contributions
before reaching the $61,000 limit.
$20,500
after-tax
contribution
$10,250
employer
match
Save
another
$30,250
" [Making] an after-tax 401(k) contribution can be a great
option, especially for people who work at companies where
participants may do an in-plan conversion to a Roth feature,
Feinschreiber says. The conversion
option could allow someone to transfer
the after-tax contribution to a Roth
feature while still in active service, let
the money grow, then,
in retirement,
withdraw both the original contribution
and the appreciation tax-free.
Known as a mega backdoor Roth,
this strategy is popular with HCE
participants.
" If they leave the money in after-tax
[without a Roth conversion], they'd pay
taxes on the earnings when they withdraw
the money but not on the original
contribution, " he says. " And the earnings
would be taxed at the ordinary
income-tax rate, not the capital-gains
tax rate. " For an affluent investor, he
says, that might mean a sizeable tax
bill. He cautions
that participants
always should consult their tax expert
before deciding whether to do the Roth
conversion.
$61,000 limit
contributions? It's mainly the highly compensated individuals, "
he says. " So, many executives may find that their
ability to make after-tax contributions will be much more
limited than what they thought. "
Wagstaff & Crawford has one plan client that has successfully
implemented an after-tax, non-Roth savings feature.
The plan has about 60 participants, for a 95% participation
rate, and uses both automatic enrollment and automatic
escalation. The employer makes both an enhanced safe
harbor match and a substantial profit-sharing contribution,
which motivates participation. The company has low
employee turnover, so many participants stay long enough
to accumulate substantial retirement savings. The business
A plan with an after-tax contribution
feature does not have to also offer
in-plan Roth conversions; however, the
ability to do a mega-backdoor Roth contribution while still
an active participant is frequently the appeal of making
these contributions, says Benz. Someone can make an
after-tax contribution, then utilize an in-plan conversion
feature to immediately transfer that money into the plan's
Roth feature.
" Not only will that person enjoy a tax-free Roth distribution
in retirement, but Roth money is not subject to RMD
[required minimum distribution] rules, " she says. " You can
get more money into a Roth than if you contribute it into
a Roth IRA. What you can put into a Roth this way makes
the Roth IRA contribution limit seem like chump change. "
-Judy Ward
30 | planadviser.com July-August 2022
http://www.planadviser.com

PLANADVISER - July/August 2022

Table of Contents for the Digital Edition of PLANADVISER - July/August 2022

Balancing Act
Greater Access
Previewing Plan Features
A Different Way to Save
Next-Level Options
New Territory for Income?
Compliance for Wealth Managers
If Caught Off Guard by A Failure
Larry E. Crocker
PLANADVISER - July/August 2022 - C1
PLANADVISER - July/August 2022 - FC1
PLANADVISER - July/August 2022 - FC2
PLANADVISER - July/August 2022 - C2
PLANADVISER - July/August 2022 - 1
PLANADVISER - July/August 2022 - 2
PLANADVISER - July/August 2022 - 3
PLANADVISER - July/August 2022 - 4
PLANADVISER - July/August 2022 - 5
PLANADVISER - July/August 2022 - 6
PLANADVISER - July/August 2022 - 7
PLANADVISER - July/August 2022 - 8
PLANADVISER - July/August 2022 - 9
PLANADVISER - July/August 2022 - 10
PLANADVISER - July/August 2022 - 11
PLANADVISER - July/August 2022 - 12
PLANADVISER - July/August 2022 - 13
PLANADVISER - July/August 2022 - 14
PLANADVISER - July/August 2022 - 15
PLANADVISER - July/August 2022 - Balancing Act
PLANADVISER - July/August 2022 - 17
PLANADVISER - July/August 2022 - 18
PLANADVISER - July/August 2022 - 19
PLANADVISER - July/August 2022 - Greater Access
PLANADVISER - July/August 2022 - 21
PLANADVISER - July/August 2022 - 22
PLANADVISER - July/August 2022 - 23
PLANADVISER - July/August 2022 - Previewing Plan Features
PLANADVISER - July/August 2022 - 25
PLANADVISER - July/August 2022 - 26
PLANADVISER - July/August 2022 - 27
PLANADVISER - July/August 2022 - A Different Way to Save
PLANADVISER - July/August 2022 - 29
PLANADVISER - July/August 2022 - 30
PLANADVISER - July/August 2022 - 31
PLANADVISER - July/August 2022 - Next-Level Options
PLANADVISER - July/August 2022 - 33
PLANADVISER - July/August 2022 - 34
PLANADVISER - July/August 2022 - 35
PLANADVISER - July/August 2022 - New Territory for Income?
PLANADVISER - July/August 2022 - 37
PLANADVISER - July/August 2022 - Compliance for Wealth Managers
PLANADVISER - July/August 2022 - If Caught Off Guard by A Failure
PLANADVISER - July/August 2022 - Larry E. Crocker
PLANADVISER - July/August 2022 - Cover3
PLANADVISER - July/August 2022 - Cover4
https://www.planadviserdigital.com/planadviser/winter_2023
https://www.planadviserdigital.com/planadviser/fall_2023
https://www.planadviserdigital.com/planadviser/summer_2023
https://www.planadviserdigital.com/planadviser/industryleader_2023
https://www.planadviserdigital.com/planadviser/spring_2023
https://www.planadviserdigital.com/planadviser/november_december_2022
https://www.planadviserdigital.com/planadviser/september_october_2022
https://www.planadviserdigital.com/planadviser/july_august_2022
https://www.planadviserdigital.com/planadviser/may_june_2022
https://www.planadviserdigital.com/planadviser/industry_leader_awards_2022
https://www.planadviserdigital.com/planadviser/march_april_2022
https://www.planadviserdigital.com/planadviser/january_february_2022
https://www.planadviserdigital.com/planadviser/november_december_2021
https://www.planadviserdigital.com/planadviser/september_october_2021
https://www.planadviserdigital.com/planadviser/july_august_2021
https://www.planadviserdigital.com/planadviser/may_june_2021
https://www.planadviserdigital.com/planadviser/march_april_2021
https://www.planadviserdigital.com/planadviser/january_february_2021
https://www.planadviserdigital.com/planadviser/november_december_2020
https://www.planadviserdigital.com/planadviser/september_october_2020
https://www.planadviserdigital.com/planadviser/july_august_2020
https://www.planadviserdigital.com/planadviser/may_june_2020
https://www.planadviserdigital.com/planadviser/march_april_2020
https://www.planadviserdigital.com/planadviser/january_february_2020
https://www.planadviserdigital.com/planadviser/november_december_2019
https://www.planadviserdigital.com/planadviser/september_october_2019
https://www.planadviserdigital.com/planadviser/july_august_2019
https://www.planadviserdigital.com/planadviser/may_june_2019
https://www.planadviserdigital.com/planadviser/march_april_2019
https://www.planadviserdigital.com/planadviser/january_february_2019
https://www.planadviserdigital.com/planadviser/november_december_2018
https://www.planadviserdigital.com/planadviser/september_october_2018
https://www.planadviserdigital.com/planadviser/july_august_2018
https://www.planadviserdigital.com/planadviser/may_june_2018
https://www.planadviserdigital.com/planadviser/march_april_2018
https://www.planadviserdigital.com/planadviser/january_february_2018
https://www.planadviserdigital.com/planadviser/november_december_2017
https://www.planadviserdigital.com/planadviser/september_october_2017
https://www.planadviserdigital.com/planadviser/july_august_2017
https://www.nxtbookmedia.com