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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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My business has a Safe Harbor 401k plan. Please clarify if

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My business has a Safe Harbor 401k plan. Please clarify if I add a Roth component to the Safe Harbor plan can the Highly Compensated Employees contribute to the Roth regardless of income level or is this Roth also associated with the AGI limitations.

LEV :

Hi and welcome to Just Answer!
There are no limits on your income in determining if you can make designated Roth contributions. Of course, you have to have salary from which to make any 401(k) deferrals.
Designated Roth contributions are treated the same as traditional, pre-tax elective contributions when performing annual nondiscrimination testing. A plan can provide that a highly compensated employee, as defined in Code §414(q), with both traditional, pre-tax elective contributions and designated Roth contributions during a year may elect to attribute excess contributions to pre-tax elective or designated Roth contributions.


Designated Roth accounts are treated just like other elective deferral accounts and must be included when calculating the top-heavy ratio each year.

Customer:

Ok. Please assist in breaking this down. For the Roth under a Safe Harbor the HCE can contribute max of $17,000 this year with match from the company or $17,000 from 401k with match but not both or can there be a combination of the two.

LEV :

The combined amount contributed to all designated Roth accounts and traditional, pre-tax accounts in any one year for any individual is limited (under Code §402(g)). The limit is $17,000 in 2012 plus an additional $5,500 in catch-up contributions in 2012 if you are age 50 or older at the end of the year.
The company match is not treated as the designated Roth contribution - it is accounted separately.

Customer:

OK. THX. What is the advantage of adding a Roth to the Safe Harbor if any for the HCE???

LEV :

There is no separate advantage of having Roth option for the HCE. The advantage of having Roth option - is that earning potentially will never be taxable. The disadvantage - there is no current tax benefits for the contribution. So mainly by using Roth option you give up immediate tax benefits in exchange for potentially larger future tax benefits.

Customer:

Understand. So The Roth contribution will be post-tax and not deductible on a W2 but at age 59 1/2 one could use this money without paying tax on it. Correct?

LEV :

Yes - that is correct - you will not be taxed on your contribution (because it is already after tax) and potentially - will not be taxed on earning on your contributions.

LEV :

Your employer can only allocate your designated Roth contributions to your designated Roth account. Your employer must allocate any contributions to match designated Roth contributions into a pre-tax account, just like matching contributions on traditional, pre-tax elective contributions.


Matching contributions from the employer are limited to 25% of your salary (20% of self-employment income). The compensation limitation for this purpose is $250,000 for 2012 and $255,000 for 2013.


In addition, annual contributions to all of your accounts - this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures to your accounts - may not exceed the lesser of 100% of your compensation or $50,000 for 2012 and $51,000 for 2013.

Customer:

Thx for the clarification. This is most confusing.

LEV :

Sorry for confusion. Please keep conversation going if you need any help.

Customer:

You have been very helpful. Thank you.

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