Does IRC section 415(c) compensation include after-tax 401(k) contributions?

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userwithconcern
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Does IRC section 415(c) compensation include after-tax 401(k) contributions?

Post by userwithconcern »

I seem to not be able to find a clear answer. Does the compensation limit talked about in section 415(c) include after-tax (non-Roth) contributions to 401(k) plans?

Is it true that employer match is not considered compensation? If so, couldn't an employer match violate the 100% of compensation rule in section 415?
Lionel Hutz
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Re: Does IRC section 415(c) compensation include after-tax 401(k) contributions?

Post by Lionel Hutz »

As far as I know after-tax is included. Is the scope of yourself question about Highly Compensated Employee status and nondiscrimination testing?
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retiredjg
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Re: Does IRC section 415(c) compensation include after-tax 401(k) contributions?

Post by retiredjg »

From https://www.irs.gov/retirement-plans/fi ... articipant
  • The types of contributions subject to the limit include:

    elective contributions (pre-tax or Roth) made to 401(k), and salary reduction SEP plans;
    after-tax employee contributions;
    employer matching contributions;
    employer profit-sharing contributions; and
    any employer contributions.
I thought forfeitures were part of this limit as well. Perhaps that is included under "any employer contributions".
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userwithconcern
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Re: Does IRC section 415(c) compensation include after-tax 401(k) contributions?

Post by userwithconcern »

Lionel Hutz wrote: Sat Jul 24, 2021 7:28 am As far as I know after-tax is included. Is the scope of yourself question about Highly Compensated Employee status and nondiscrimination testing?
I guess I misphrased the question. The requirement as I understand it from 415(c) is that aggregate contributions to a 401(k) plan must not exceed 100% of compensation from the associated employer. My question really is whether making an after-tax contribution could decrease compensation by the amount of the after-tax contribution, such that the higher the after-tax contributions, the lower the 415(c) compensation?

For instance, I read somewhere that employer match does not count toward compensation, don't know if it is correct.
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FiveK
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Re: Does IRC section 415(c) compensation include after-tax 401(k) contributions?

Post by FiveK »

userwithconcern wrote: Sat Jul 24, 2021 1:24 pm My question really is whether making an after-tax contribution could decrease compensation by the amount of the after-tax contribution
No, it cannot. E.g., someone with a $6000 W-2 box 1 could contribute $6000 to a Roth 401k, and $6000 to an IRA.
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Lee_WSP
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Re: Does IRC section 415(c) compensation include after-tax 401(k) contributions?

Post by Lee_WSP »

userwithconcern wrote: Sat Jul 24, 2021 1:24 pm
Lionel Hutz wrote: Sat Jul 24, 2021 7:28 am As far as I know after-tax is included. Is the scope of yourself question about Highly Compensated Employee status and nondiscrimination testing?
I guess I misphrased the question. The requirement as I understand it from 415(c) is that aggregate contributions to a 401(k) plan must not exceed 100% of compensation from the associated employer. My question really is whether making an after-tax contribution could decrease compensation by the amount of the after-tax contribution, such that the higher the after-tax contributions, the lower the 415(c) compensation?

For instance, I read somewhere that employer match does not count toward compensation, don't know if it is correct.
Unless you are paid less than $19,500 this is a non issue.

If you are, the maximum you can contribute is 100% withholdings, whatever that comes out to.
Alan S.
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Re: Does IRC section 415(c) compensation include after-tax 401(k) contributions?

Post by Alan S. »

userwithconcern wrote: Sat Jul 24, 2021 1:24 pm
Lionel Hutz wrote: Sat Jul 24, 2021 7:28 am As far as I know after-tax is included. Is the scope of yourself question about Highly Compensated Employee status and nondiscrimination testing?
I guess I misphrased the question. The requirement as I understand it from 415(c) is that aggregate contributions to a 401(k) plan must not exceed 100% of compensation from the associated employer. My question really is whether making an after-tax contribution could decrease compensation by the amount of the after-tax contribution, such that the higher the after-tax contributions, the lower the 415(c) compensation?

For instance, I read somewhere that employer match does not count toward compensation, don't know if it is correct.
The 415(c) limit is the lesser of
1) 58,000 or
2) 100% of compensation (which includes everything on the W-2 including cafeteria deductions, etc, but NOT the employer matching contribution.

So making after tax contributions would not decrease 415(c) compensation, but in very rare cases where compensation is lower than 58,000, a lower paid employee in a position to contribute nearly all their wages might make enough after tax contributions for the employer match to create an excess annual addition based on compensation rather than the 58,000 limit.

I am guessing here, but if a plan experiences too many of these excesses, they might reduce the plan max contributions to less than 100%, or simply limit after tax contributions. This would limit the contributions, but the 415c limit remains at 100%, so these excesses would be eliminated. But if the excesses due to the comp limit are rare enough, the plan might live with them and just return the excess (with earnings) for that employee each year. When making that corrective distribution, it would generally come first from unmatched after tax contributions, and second from any matched after tax contributions. If matched after tax contributions must be returned, the match on the returned contributions is also returned.

I doubt if discrimination testing would also be a factor for these employees, since those with comp < 58,000 would not be HCEs.
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userwithconcern
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Re: Does IRC section 415(c) compensation include after-tax 401(k) contributions?

Post by userwithconcern »

Alan S. wrote: Sat Jul 24, 2021 2:02 pm
The 415(c) limit is the lesser of
1) 58,000 or
2) 100% of compensation (which includes everything on the W-2 including cafeteria deductions, etc, but NOT the employer matching contribution.

So making after tax contributions would not decrease 415(c) compensation, but in very rare cases where compensation is lower than 58,000, a lower paid employee in a position to contribute nearly all their wages might make enough after tax contributions for the employer match to create an excess annual addition based on compensation rather than the 58,000 limit.

I am guessing here, but if a plan experiences too many of these excesses, they might reduce the plan max contributions to less than 100%, or simply limit after tax contributions. This would limit the contributions, but the 415c limit remains at 100%, so these excesses would be eliminated. But if the excesses due to the comp limit are rare enough, the plan might live with them and just return the excess (with earnings) for that employee each year. When making that corrective distribution, it would generally come first from unmatched after tax contributions, and second from any matched after tax contributions. If matched after tax contributions must be returned, the match on the returned contributions is also returned.

I doubt if discrimination testing would also be a factor for these employees, since those with comp < 58,000 would not be HCEs.
Thank you Alan for responding! :)

As a follow-up question, can the employer/the plan choose to exclude any amount included in W-2 box 1, if they want to? For instance, 415(c)(3)(D) says that elective deferrals must be included, but it does not say that about other things. I am wondering if your answer is what plans typically do, or if what they are mandated to do? Thanks!
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FiveK
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Re: Does IRC section 415(c) compensation include after-tax 401(k) contributions?

Post by FiveK »

userwithconcern wrote: Sat Jul 24, 2021 3:23 pm ...can the employer/the plan choose to exclude any amount included in W-2 box 1...?
Exclude from what?
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userwithconcern
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Re: Does IRC section 415(c) compensation include after-tax 401(k) contributions?

Post by userwithconcern »

FiveK wrote: Sat Jul 24, 2021 5:01 pm
userwithconcern wrote: Sat Jul 24, 2021 3:23 pm ...can the employer/the plan choose to exclude any amount included in W-2 box 1...?
Exclude from what?
I meant to ask whether it can be excluded from 415(c) compensation. For example, I think up until SBJPA of 1996 added section 415(c)(3)(D) to the IRC, plans could elect to exclude elective deferrals from the definition of 415(c) compensation.

It is just really unfortunate how there is so little that I can find in the IRC text or even the CFR sections interpreting it, that defines 415(c) compensation.
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Lee_WSP
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Re: Does IRC section 415(c) compensation include after-tax 401(k) contributions?

Post by Lee_WSP »

userwithconcern wrote: Sat Jul 24, 2021 5:30 pm
FiveK wrote: Sat Jul 24, 2021 5:01 pm
userwithconcern wrote: Sat Jul 24, 2021 3:23 pm ...can the employer/the plan choose to exclude any amount included in W-2 box 1...?
Exclude from what?
I meant to ask whether it can be excluded from 415(c) compensation. For example, I think up until SBJPA of 1996 added section 415(c)(3)(D) to the IRC, plans could elect to exclude elective deferrals from the definition of 415(c) compensation.

It is just really unfortunate how there is so little that I can find in the IRC text or even the CFR sections interpreting it, that defines 415(c) compensation.
Your employer is completely agnostic as to how much you choose to deduct from your paycheck. Whether you're able to defer the entire salary (you have to pay FICA) is a different question.
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