Voluntary after-tax contributions (not to be confused with Roth contributions) are just what they sound like. These contributions are made in after-tax dollars and the taxes on the earnings are deferred until the year of distribution.
Most 401(k) plans do not allow voluntary after-tax contributions because there has been little interest from participants in years past. However, interest in after-tax contributions has been quickly growing due to a recent Internal Revenue Notice that allows the rollover of after-tax contributions from a 401(k) plan to a Roth IRA while the earnings on such contributions are rolled to a traditional IRA.
In a 401(k) plan that permits voluntary after-tax contributions, however, such individuals may contribute on an after-tax basis up to the annual limit on all contributions (for 2019, $56,000 / $62,000 if 50 or older). Thus, if an individual elects pretax or Roth deferrals up to the annual limit of $19,000, there is still an opportunity to make up to $37,000 in after-tax contributions.
Later, when the individual is eligible for a distribution, the after-tax contributions may be rolled to a Roth IRA and their future earnings may escape all taxation.
It is worth noting, however, that after-tax contributions are still included in the actual contribution percentage test (“ACP test”) that applies to matching contributions. Because the primary users of after-tax contributions are typically HCEs, this can be problematic for smaller plans as it could easily lead to a failed test. Thus, this plan feature is able to work most efficiently in larger organizations where the “law of averages” can provide an advantage in diluting the testing impact. Organizations with high-earning NHCEs and high participation can also often continue to pass the ACP tests. In the case of a failing test, refunds will be made on an after-tax basis back to the HCEs that made the contributions.