Exceeding the $53k contribution limit. Options?

[porkisking]

So I did my first Mega Back Door Roth this year but miscalculated my contributions. If I set my contribution amount to the lowest amount possible but still enough to receive my full company match, I will have contributed $58k by the end of the year (and only $14k into my 401k pre-tax amount). Or if I set my contribution amount so that I put in the full $18k on the 401k pre-tax, I will have contributed $62k by the end of the year.

I could lower my contributions so that I won't exceed the $53k limit for the year, but then I would be leaving company match money on the table. Assuming my employers plan would even let me go over $53k, does anyone have any advice on whether I should do it? What are the tax consequences? What would I need to do with the excess over $53k? Would I have to withdraw it myself it before April 15? Any early withdrawal penalties?

I read somewhere also that I can inform my plan administrator of the excess who would then return the contributions (and gains from them) back to me as income, and I would report it as income. Is this different than me just withdrawing it myself? Am I getting taxed twice somewhere?

Do I lose the tax deduction to my 401k pre-tax when I withdraw it?

Any advice on how I should correct this issue is much appreciated.

[Alan S.]

You should generally figure how much your max match will be, add about 1,000 for forfeitures credited to your account plus the 18k elective deferral limit and then subtract that total from 53k (2015) to get the max after tax contribution you should make. Many plans do this calculation and limit your after tax contributions for you to prevent breaching the limit.

In any event, if you exceed the 53k limit, this is called an excess annual addition under Sec 415(c). You must request the corrective distribution so the plan codes it correctly (Code E) on your 1099R. The distribution includes an earning calculation and the earnings are taxable in the year distributed. There is no penalty on the distribution. But if the plan requires the distribution to include any pre tax contributions, then those contributions would be taxable as well as the earnings. Therefore, you might try to adjust your contributions now in order to eliminate a larger corrective distribution when you order it after 2015 ends.

[Spirit Rider]

So I did my first Mega Back Door Roth this year but miscalculated my contributions. If I set my contribution amount to the lowest amount possible but still enough to receive my full company match, I will have contributed $58k by the end of the year (and only $14k into my 401k pre-tax amount). Or if I set my contribution amount so that I put in the full $18k on the 401k pre-tax, I will have contributed $62k by the end of the year.

I do not understand this. Your plan should allow you to independently set the percentage for salary deferral and the percentage for after-tax contributions.

[porkisking]

So I did my first Mega Back Door Roth this year but miscalculated my contributions. If I set my contribution amount to the lowest amount possible but still enough to receive my full company match, I will have contributed $58k by the end of the year (and only $14k into my 401k pre-tax amount). Or if I set my contribution amount so that I put in the full $18k on the 401k pre-tax, I will have contributed $62k by the end of the year.

I do not understand this. Your plan should allow you to independently set the percentage for salary deferral and the percentage for after-tax contributions.

I wanted to front-load my contributions so that I could get them into my Roth as soon as possible so that they could start growing tax free. As I understand it, the gains on the 401k after-tax contributions would need to get rolled over into an IRA which is taxed upon withdrawal. So the sooner I can move it into my Roth, the sooner it grows tax free.

The calculation is not so easy for me. On top of salary, I also get 2 additional income events per year.
1. A bonus, which depends upon personal and company performance. This varies every year.
2. A profit sharing contribution, which depends upon company performance and goes directly into the 401k.

Both 1 & 2 were larger than I anticipated. After they went into my 401k, I calculated that if I continue to contribute 6% of my salary (which is what I need in order to get the full company match every paycheck) I will have contributed over $53k by the end of the year.

[Skerrick]

I assume you already know the plan rules around company match, but I would double check to see if they continue to match in the event you can't contribute due to the limit.

It is sometimes referred to as "true up."

Every 401k is different and without reading over the plan documents, there is no way of knowing. I would call the record keeper for the 401k then probably the plan admin to confirm.

[porkisking]

In any event, if you exceed the 53k limit, this is called an excess annual addition under Sec 415(c). You must request the corrective distribution so the plan codes it correctly (Code E) on your 1099R. The distribution includes an earning calculation and the earnings are taxable in the year distributed. There is no penalty on the distribution. But if the plan requires the distribution to include any pre tax contributions, then those contributions would be taxable as well as the earnings. Therefore, you might try to adjust your contributions now in order to eliminate a larger corrective distribution when you order it after 2015 ends.

So if I'm understanding this correctly, this is how the numbers would play out for me. If I continue my minimum contribution every paycheck so that I get the full company match, I would have a total of $58k ($5k excess) by the end of the year which consists of $28k after-tax, $30k pre-tax. The $28k is already rolled over into my Roth IRA. The $30k pre-tax will consist of $14k employee contributions and $16k company contributions. Let's assume the earnings on the $5k excess is $1k.

At the end of the year, I would request the corrective distribution for the $5k excess contributions + $1k earnings. The $6k would be taxable income because it came from pre-tax contributions and earnings.

The benefit of the 401k pre-tax contributions is that I get to deduct it from my income. If I'm adding the excess back to my income at the end of the year, I guess this means that any pre-tax contributions in excess of $53k won't be of any benefit. So really that $14k pre-tax contribution I will be deducting will effectively end up being $14k - $6k => $8k deduction. Is that right?

Interestingly, this seems like the strategy is that I want my excess contributions to be earning as little as possible so that I won't have to pay income tax on it. For example, if the earnings on the $5k excess contributions were $3k, then my tax deduction at the end of the year would only be $14k - $8k => $6k deduction. Does that make sense?

In hindsight, aside from front-loading too much, I should have maxed out my 401k pre-tax before doing any after-tax contributions. The excess then would come from the 401k after-tax contributions which means I will have received the full $18k deduction. Does that sound right? EDIT: actually, this doesn't make sense because I wanted my front-loading contributions to go into 401k after-tax so that I could do the mega back door roth.

A final option would be to lower my contribution to stay under $53k, but therefore leaving money on the table because I wouldn't be getting the full company match every paycheck. Would this scenario ever make sense?

[porkisking]

I assume you already know the plan rules around company match, but I would double check to see if they continue to match in the event you can't contribute due to the limit.

It is sometimes referred to as "true up."

Every 401k is different and without reading over the plan documents, there is no way of knowing. I would call the record keeper for the 401k then probably the plan admin to confirm.

Thanks for this. I did check my plan documents and it didn't mention anything about the company match policy in the event I can't contribute due to the limit. Only that I must contribute every paycheck to receive company match each paycheck. I did email the plan administrator for details.

[Alan S.]

You would expect a plan with bonuses as well as after tax contributions would set guidelines to limit the possibility of excess annual additions. Otherwise they will get more employees exceeding the limit. Once the limit is exceeded the plan provisions will indicate which account is used first for the corrective distribution, and what happens if the part of the plan (eg the after tax sub account) has been rolled out.

SInce you will have rolled out your after tax balance in most cases, it is likely that the corrective distribution will come from pre tax funds and therefore be taxable in the year of the distribution. But it may also be possible that the plan reduces the 1099R for the rollover and issues the difference as a corrective distribution. In that case, you would have to deal with an excess Roth IRA contribution because the 1099R for the rollover will be less than the amount actually rolled over.

With all these variables, you will need full plan information in order to devise the best strategy for taking advantage of the plan options.

[ERISA Stone]

I assume you are an HCE as it looks like your compensation is in the $200k-260k range. Depending on the size of your company, you may also be hurting the nondiscrimination test for matching contributions, as after-tax (non-Roth) contributions are included in that test. If that's the case, your account will experience more refunds/forfeitures, on top of the 415 excess it looks like you may have already created.

Any possibility your company also provides a profit sharing contribution? I don't see that you have accounted for that.

[porkisking]

I assume you are an HCE as it looks like your compensation is in the $200k-260k range. Depending on the size of your company, you may also be hurting the nondiscrimination test for matching contributions, as after-tax (non-Roth) contributions are included in that test. If that's the case, your account will experience more refunds/forfeitures, on top of the 415 excess it looks like you may have already created.

Any possibility your company also provides a profit sharing contribution? I don't see that you have accounted for that.

I've received emails about HCE and non-discrimination: "Before-Tax Contributions, Roth Contributions and Employer matching contributions under the 401(k) plan will not have to be tested to ensure that they do not discriminate in favor of highly compensated employees. After-Tax Contributions will continue to have to be tested."

I mentioned briefly in a post above that I received a bonus and profit sharing contribution. Neither had any company match associated with it. I'm not really sure what any of this non-discrimination testing means and whether it applies to me. Can you help explain or point me in the right direction?

[porkisking]

I assume you already know the plan rules around company match, but I would double check to see if they continue to match in the event you can't contribute due to the limit.

It is sometimes referred to as "true up."

Every 401k is different and without reading over the plan documents, there is no way of knowing. I would call the record keeper for the 401k then probably the plan admin to confirm.

The administrator got back to me and said:
"As soon as your total contributions are over $53k, we will stop all the contributions including the company match. Unfortunately, there is nothing that we can do about this. The 401(k) plans are heavily regulated by the IRS and we need to follow the rules. If for any reason, the contributions go over the $53k limit, the excess contribution is returned to the employee and Vanguard will issue a tax form the following year. "

So maybe I'm out of luck here and won't be able to go above $53k and get my company match. Although the 'if for any reason' leaves the door open to a possibility.

[Bill M]

My experience with this limit; just FYI, as it may or not apply in your case.

Every year I exceeded the 415(c) limit, somewhat intentionally due extremely low expense ratios within the 401k plan. As I approached the limit, I watched for payroll dept to turn off the contributions. When they did, I turned them back on. Contributions and company match continued, until end of year. Around March/April of following year I got a check in the mail for the excess contribution (after-tax) and earnings on that (taxable), and in January of the following year I received a 1099-R showing the amounts. It all worked just fine, without any intervention on my part (except for turning the contributions back on when they were stopped). And I never heard any complaints from the HR department.

My plan didn't allow distributions until leaving the company or 59.5, so the mega-backdoor conversion was "in-plan." One year I did a large in-plan Roth conversion, wiping out all of the after-tax balance and part of the pre-tax. The following year I did after-tax contributions first, so that the corrective distribution would have enough after-tax in the account when they sent the check.

HCE? Quite possibly, as I received a notice early every year that contributions might be returned if the plan didn't meet IRS qualifications. Never received any though.


I would consider this year an experiment and see what happens. The one thing you can be certain of is that your contributions won't be lost; they might just be in limbo for a month in 2016.

[ERISA Stone]

I've received emails about HCE and non-discrimination: "Before-Tax Contributions, Roth Contributions and Employer matching contributions under the 401(k) plan will not have to be tested to ensure that they do not discriminate in favor of highly compensated employees. After-Tax Contributions will continue to have to be tested."

I mentioned briefly in a post above that I received a bonus and profit sharing contribution. Neither had any company match associated with it. I'm not really sure what any of this non-discrimination testing means and whether it applies to me. Can you help explain or point me in the right direction?

So it sounds like you have a safe harbor matching contribution? Does that term sound familiar? Or do you possibly receive a 3% safe harbor nonelective contribution? It sounds like you have the following possible sources that count towards the $53k limit:

• Salary deferrals - up to 18k
  Matching conributions
  Profit sharing contributions
  Forfeitures
  After-tax (non-Roth) contributions

Based on this IRS link, it appears your un-matched deferrals are refunded first. The example doesn't include after-tax (non-Roth) but if I had to guess, I think those would be refunded first. I would go back to your HR and ask. http://www.irs.gov/Retirement-Plans/Fix ... articipant

When your HR mentions the nondiscrimination test in regards to after-tax contributions, it means they take the average contribution rate (it sounds like only related to the after-tax source) of the HCEs and compare it to the same rate of the NHCEs. If the averages aren't within certain limits, generally 2%, then the test fails and HCEs may receive refunds for correction. As you can imagine, very few NHCEs make after-tax contributions.

For the 2015 plan year, an HCE is a participant who either a. had compensation in excess of $115k in 2014; or b. owned greater than 5% of the company in 2014 or 2015. There is also a 20% top paid group rule that could limit the $115k pool to 20% of the active participants in the plan. The top paid election is plan specific.

The refund isn't something you have to request. It's the TPA's job to let your client know a participant exceeds this limit. If you want to notify them you can, but the reality is the exact amount can't be determined until all contributions & forfeitures have been allocated, usually well into the next calendar year.

[porkisking]

So it sounds like you have a safe harbor matching contribution? Does that term sound familiar? Or do you possibly receive a 3% safe harbor nonelective contribution?
...
When your HR mentions the nondiscrimination test in regards to after-tax contributions, it means they take the average contribution rate (it sounds like only related to the after-tax source) of the HCEs and compare it to the same rate of the NHCEs. If the averages aren't within certain limits, generally 2%, then the test fails and HCEs may receive refunds for correction. As you can imagine, very few NHCEs make after-tax contributions.

The refund isn't something you have to request. It's the TPA's job to let your client know a participant exceeds this limit. If you want to notify them you can, but the reality is the exact amount can't be determined until all contributions & forfeitures have been allocated, usually well into the next calendar year.

Thanks for the info! Yes, we have a safe harbor matching contributions: "The Safe Harbor Notice explains that the 401(k) plan will continue to be a “Safe Harbor” plan in 2015 with respect to Before-Tax Contributions, Roth Contributions and Employer matching contributions. This means that Before-Tax Contributions, Roth Contributions and Employer matching contributions under the 401(k) plan will not have to be tested to ensure that they do not discriminate in favor of highly compensated employees. After-Tax Contributions will continue to have to be tested".

Since I'm a HCE (I'm assuming since compensation is excess of $115k), this means when I contributed 28k in after-tax contributions for the mega back-door Roth will be tested. I'm hoping I don't fail the test. When will I know? And what kind of mess would ensue if I did fail the test and I already did the in-service rollover of the after-tax contributions into a Roth?

I'll keep trying to contribute to get my company match and try to go above the $53k limit. According to the TPA, it should automatically stop. But maybe I can turn it back on as the previous poster mentioned.

[Vilgan]

So it sounds like you have a safe harbor matching contribution? Does that term sound familiar? Or do you possibly receive a 3% safe harbor nonelective contribution?
...
When your HR mentions the nondiscrimination test in regards to after-tax contributions, it means they take the average contribution rate (it sounds like only related to the after-tax source) of the HCEs and compare it to the same rate of the NHCEs. If the averages aren't within certain limits, generally 2%, then the test fails and HCEs may receive refunds for correction. As you can imagine, very few NHCEs make after-tax contributions.

The refund isn't something you have to request. It's the TPA's job to let your client know a participant exceeds this limit. If you want to notify them you can, but the reality is the exact amount can't be determined until all contributions & forfeitures have been allocated, usually well into the next calendar year.

Thanks for the info! Yes, we have a safe harbor matching contributions: "The Safe Harbor Notice explains that the 401(k) plan will continue to be a “Safe Harbor” plan in 2015 with respect to Before-Tax Contributions, Roth Contributions and Employer matching contributions. This means that Before-Tax Contributions, Roth Contributions and Employer matching contributions under the 401(k) plan will not have to be tested to ensure that they do not discriminate in favor of highly compensated employees. After-Tax Contributions will continue to have to be tested".

Since I'm a HCE (I'm assuming since compensation is excess of $115k), this means when I contributed 28k in after-tax contributions for the mega back-door Roth will be tested. I'm hoping I don't fail the test. When will I know? And what kind of mess would ensue if I did fail the test and I already did the in-service rollover of the after-tax contributions into a Roth?

I'll keep trying to contribute to get my company match and try to go above the $53k limit. According to the TPA, it should automatically stop. But maybe I can turn it back on as the previous poster mentioned.

Most plans with 20% or more of the employees making over 115k choose the "top 20%" definition of HCE rather than the 115k salary definition. If this is true in your case and you aren't in the top 20% of earners, you don't need to worry about testing. In fact, if you aren't in the top 20%, it will help people who ARE in the top 20% if you max out your after-tax.

If you are an HCE, you are not personally tested. The HCEs as a group are tested and compared to the non-HCEs. The plan as a whole will then pass or fail this test. If the plan fails, the plan will need to return some money to HCEs to get back to passing status. If you are worried about this, then leaving a good % of your money in after-tax rather than rolling it into your IRA will make things a lot simpler if your plan does fail.

As for turning it back on, I'm not sure that would work since the stop will be made by payroll not by whatever system you are using to turn it back on. You can set your contribution amounts to whatever you want, but any decent payroll system should cut off all 401k payments once you hit the 53k limit.

Hope this helps.

[ERISA Stone]

Most plans with 20% or more of the employees making over 115k choose the "top 20%" definition of HCE rather than the 115k salary definition. If this is true in your case and you aren't in the top 20% of earners, you don't need to worry about testing. In fact, if you aren't in the top 20%, it will help people who ARE in the top 20% if you max out your after-tax.

If you are an HCE, you are not personally tested. The HCEs as a group are tested and compared to the non-HCEs. The plan as a whole will then pass or fail this test. If the plan fails, the plan will need to return some money to HCEs to get back to passing status. If you are worried about this, then leaving a good % of your money in after-tax rather than rolling it into your IRA will make things a lot simpler if your plan does fail.

As for turning it back on, I'm not sure that would work since the stop will be made by payroll not by whatever system you are using to turn it back on. You can set your contribution amounts to whatever you want, but any decent payroll system should cut off all 401k payments once you hit the 53k limit.

Hope this helps.

Most plans don't have 20% of the eligible participants making over the HCE level, especially if you throw out greater than 5% owners, since they are HCEs regardless. Even if that's the case, I think the OP is quite a bit higher than the HCE minimum. He previously said he was making a 6% 401k deferral, and earlier said that's around $14k. That would make his compensation over $200k.

The refund depends on what test/limit fails. If it is the ACP test (testing the average contribution rate for match/after-tax contributions), the refund must be made by 3/15/2016 (for the 2015 plan year) in order to avoid a 10% excise tax for the COMPANY.

If the 415 limit is exceeded ($53k), the correction must be made by 12/31 of the following year in order for the plan to remain qualified.

OP, any chance you are over age 50? If so, if you haven't taken advantage of the catch-up deferral ($6k for 2015) and you exceed any limit, part of your correction can be reclassified as catch-up.

Also, I'm making assumptions about your compensation, but if it's around what it appears to be, I would think you would want to maximize your deductions and defer the maximum pre-tax 401k deferral. If you were to go that route, I would have your HR contact to confirm that the correction would happen as we have stated in this thread. In that case, I believe your refund would only be after-tax contributions (plus attributable earnings).

[porkisking]

OP, any chance you are over age 50? If so, if you haven't taken advantage of the catch-up deferral ($6k for 2015) and you exceed any limit, part of your correction can be reclassified as catch-up.

Also, I'm making assumptions about your compensation, but if it's around what it appears to be, I would think you would want to maximize your deductions and defer the maximum pre-tax 401k deferral. If you were to go that route, I would have your HR contact to confirm that the correction would happen as we have stated in this thread. In that case, I believe your refund would only be after-tax contributions (plus attributable earnings).

My total compensation fluctuates since it's made up of a bonus and profit sharing into the 401k. But last year it was just under 200k. I'm also not over 50.

Yes, I do want to maximize my pre-tax 401k. By correction, you mean the 1099R for the excess of $53k (assuming I'm able to do it, which doesn't seem likely at this point)? But assuming I'm able to, I'm not sure how it would come out of my after-tax contributions if it's been rolled into my Roth already from the mega back door conversion.

[ERISA Stone]

OP, any chance you are over age 50? If so, if you haven't taken advantage of the catch-up deferral ($6k for 2015) and you exceed any limit, part of your correction can be reclassified as catch-up.

Also, I'm making assumptions about your compensation, but if it's around what it appears to be, I would think you would want to maximize your deductions and defer the maximum pre-tax 401k deferral. If you were to go that route, I would have your HR contact to confirm that the correction would happen as we have stated in this thread. In that case, I believe your refund would only be after-tax contributions (plus attributable earnings).

My total compensation fluctuates since it's made up of a bonus and profit sharing into the 401k. But last year it was just under 200k. I'm also not over 50.

Yes, I do want to maximize my pre-tax 401k. By correction, you mean the 1099R for the excess of $53k (assuming I'm able to do it, which doesn't seem likely at this point)? But assuming I'm able to, I'm not sure how it would come out of my after-tax contributions if it's been rolled into my Roth already from the mega back door conversion.

The plan sponsor must administer the plan according to the terms of the plan document and applicable regulations. If the regs say the refunds must come from after-tax (nonRoth) first and you have already converted the $$ to an IRA, my opinion is it's your plan sponsor's obligation to contact the IRA to notify them that you have non-qualified funds in your IRA, and they should be refunded to you. But it wouldn't be their obligation to confirm the refund took place. That would be on you.

I am making an educated guess on the mechanics. Frankly, the $53k limit is almost never exceeded in retirement plans, and I've certainly never had one that involved after-tax contributions, as those contributions are not common. And I'm not going to spend the hours it might take to find out the answer . Lucky for you, your company has to pay to get all of this sorted out so at least you won't have to pay for the consulting. The process I outlined above re: your IRA is similar to what would happen if an HCE terminated, rolled over his balance to an IRA, and then found out a refund was due because of failed testing. I am assuming it would be similar for a 415 failure.

[ZiziPB]

I'd be surprised if your plan admin would allow contributions to be made past the $53K limit. I am in a similar situation (HCE and receive a bonus that varies but counts towards compensation basis for purposes of 401k contributions). In addition to the $53K limit, my employer's plan also has a concept of "eligible pay" which in an of itself creates a limit on your contributions. For 2015 that limit is $265,000 which means that once you reach that amount, your contributions and any match stop. Effectively this limits the total of employee and employer contributions to 20% of eligible pay ($265K x 20%= $53K). So one way or the other they stop you at a certain point and you cannot overcontribute.