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New client is doctor group (professional corporation). Group consists of 17 shareholder-employees and 3 non-shareholder employees. All employees receive W-2 compensation. Group's 401(k) Plan provides for deferrals and two match sources.

Each employee's annual compensation is "production-based" (i.e., collections - applicable overhead - direct expenses = employee's W-2 compensation). For this purpose, "overhead" includes all amounts the employee wants to contribute to the 401(k) Plan (deferrals and match), so if an employee wants to max out in 2016, $53,000 will be subtracted/withheld from what would otherwise constitute the employee's W-2 compensation - leaving the employee responsible for his or her "employer" matching contribution.

As I've not encountered a production-based compensation model in which a W-2 "employee" is responsible for all "employer" contributions to a 401(k) Plan, my questions are this:

1. Inasmuch as the Plan's matching contributions are simply subtracted from what would otherwise be paid as W-2 compensation, shouldn't all of the contributions be characterized as "elective deferrals" and otherwise subject to 402(g) limits?

2. If no issue with #1 - any issue the P.C. taking the deduction attributable to all matching contributions despite the employees actually funding the contributions?

3. To the extent all of the employees are HCEs, should I care?

Thanks in advance.

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First it sounds like you are violating the CODA rules by essentially making the elective deferral limit $53,000.

Second is this legal for the 3 non-shareholder employees?

That is yes these all sound like elective deferrals subject to the 402(g) limit.

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What you describe cannot be achieved in the conventional terms you have used. Lou S's observation indicative of the problem. You need someone with a lot of sophistication in accounting and compensation to achieve what is desired for the non-elective contributions. You should not try to circumvent W-2 compensation for elective deferrals (the elective deferral will not reduce FICA wages. the whole system will be confusing to the participants because they will be unable to match their concept of compensation with how amounts are treated for plan purposes.

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Appreciate the responses. To clarify, this is a takeover client that has apparently used this arrangement for years. I had the same "this sounds like one big, impermissible CODA" reaction when the client was explaining the structure - but wanted to confirm with the experts on the board.

Now just need to determine the fix...

Thanks again.

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I'm not sure the fix is anything other than using different descriptions. I could easily create a spreadsheet that puts everything in the right "buckets" and doesn't run afoul of the deemed CODA rules.

In general, there is nothing wrong with compensation levels being set such that there is a recognition of employer costs specific to that individual.

You have a wrinkle with the 3 non-shareholders but that is just another variable (what's three more when you are leaving things to a spreadsheet?).

Comments to your questions:

1) No.

2) I'll bet they aren't actually funding those amounts. I'll bet the plan sponsor is properly funding the amounts and you are confusing that with the fact that their W-2 is affected by the direct cost associated with that funding.

3) What does whether they are HCE's or NHCE's have to do with this discussion?

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Another thought: The key here is the choice between cash and compensation. That is what makes the CODA. So no election forms that say "I'd like to contribute $53,000 this year." If you have that, then you've got yourself a CODA.

Perhaps my clients are doing that informally (not on paper), I would not know... But as far as I know the Employer is the one deciding how much each employee gets in contributions.

Austin Powers, CPA, QPA, ERPA

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Consider (1) whether the corporation's documents correctly state the directors' (or a delegated-to committee's) resolution or other act approving the desired allocations of each shareholder-employee's compensation; (2) whether the retirement plan's documents state the desired provisions; (3) whether the corporation's Form 1120-S, Schedule K-1s, and other tax and information returns are consistent with (1) and (2); and (4) whether the corporation's financial statements, even if not audited or reviewed, are consistent with the desired allocations.

Of course, some (or even all) of this might be beyond the task of the retirement plan's TPA. But in my experience sometimes the retirement-services practitioner needs to lead other professionals.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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