Allowing for After-Tax Contributions in a 401(a) Plan

“I read with great interest your Ask the Experts column on having an after-tax contribution feature in a 403(b) plan. I work for a public university that is considering adding after-tax contributions to both its 401(a) and 403(b) plans, as we do not have ACP testing in our plans, which might normally preclude having an after-tax contribution feature. The previous column provides all the info we need to evaluate adding a 403(b) after-tax contribution. However, is there anything different that we need to consider if we add the feature to our 401(a) plan?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

All of the same issues that we point out in the 403(b) column apply in the 401(a) plan context (ACP testing, which, as you indicate, does not apply to governmental plans, employer contributions limiting after-tax contributions, withdrawal restrictions/taxation, etc.). See Code sections 401(a)(4), 401(a)(5)(G), 415(c), 401(k)(2)(B)(i) and 72(t). Like 403(b) plans, voluntary after-tax contributions to a 401(a) defined contribution (DC) plan, when combined with other contributions, are limited under 415(c) to the lesser of 100% of the participant’s compensation as defined under the plan or $58,000 in 2021. Note that the limit is the same whether the 401(a) plan is a money purchase or profit-sharing plan.

The primary difference between your 401(a) plan and 403(b) plan is that only the 403(b) plan may allow for pre-tax/Roth elective deferrals (unless you have a grandfathered 401(k) arrangement)), so the opportunity to make after-tax contributions may be greater in the 401(a) plan, depending on employer contributions, since there are no elective deferrals present that would otherwise reduce the amount of after-tax contributions a participant could make due to application of the 415(c) limit.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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