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First Contribution to 401(K) Plan


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16 replies to this topic

#1 Mike Schwing

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Posted 11 April 2008 - 01:36 PM

Plan A has eligibility requirements of age 21 with 1 year or service and quarterly entry dates. An employee meets the age and service requirements on March 1, 2008 and becomes eligible on the next quarterly entry date of April 1, 2008. The first pay-date in April is April 4, 2008 - but this pay date applies to services performed from March 21 to March 28, 2008.

Should the employer withhold 401(k) for this participant's April 4 paydate? - even though the pay applied to a period of service prior to the effectvie date of the participant's eligibility?

I think they need to withhold on the 4th but I can't find specific language in my document to state when to begin - other than the inference that you withhold when you become a participant - I see no reference to what period the pay applies to, just the date it is paid.

I have an outside TPA telling me to withhold based on applicable pay period instead of pay date - but I would think that could result in a violaiton of the max eligibilty rules - holding someone out of a 401(k) longer than is allowed by law. It also does not jive with how W-2's are prepared and my compliance testing is done.

Any thoughts would be appreciated.

#2 J Simmons

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Posted 11 April 2008 - 02:06 PM

My understanding is that you would beginning withholding the elected deferrals out of the April 4th paycheck even though the pay period began before the enrollment became effective. If it were cafeteria plan reductions that had been elected, then it would not apply because the pay period began before the enrollment became effective.
John Simmons
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Note to Readers: For you, I'm a stranger posting on a bulletin board. Posts here should not be given the same weight as personalized advice from a professional who knows or can learn all the facts of your situation.

#3 GMK

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Posted 11 April 2008 - 02:09 PM

As confusing as it is, listen to the TPA. In all likelihood, you also need to consider pay periods, not pay dates, for determining when changes in deferral elections go into effect. Eligibility and election changes cannot be retroactive. They cannot apply to compensation earned before eligibility or the effective date of an election change ... unless someone knows of exceptions.

#4 Kevin C

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Posted 11 April 2008 - 02:09 PM

I would expect that to be part of the plan's definition of Compensation. Our prototype base document defines Compensation as amounts that are actually paid to the participant by the employer during the compensation computation period.

#5 PLAN MAN

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Posted 11 April 2008 - 02:16 PM

Check the SPD, it might have specific language. Here is what I found in our SPD:

Your elective deferral agreement will be effective on the first day of the pay period following your entry date.

If it is not clear, then this is something the Plan Administrator should address and set a uniform policy for the plan.

#6 JanetM

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Posted 11 April 2008 - 02:18 PM

Using the TPAs logic you would be using a different compensation base that what you use for testing and non discrimination tests.

Constructive reciept should prevail. The employee is not eligible to defer their pay until they receive it. The participant got paid after 4/01 so the deferral should be on that pay check.
JanetM CPA, MBA

#7 masteff

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Posted 11 April 2008 - 02:19 PM

While I personally disagree w/ the TPA, it's not the end of the world to follow the TPA's advice. Presumably, it's how they advise all plans they administer, so you have consistency on your side. And the IRS/DOL isn't going to sweat over one pay date versus the next.

That said.... today's the 11th, so the real question is what did you do on the 4th? If you took the deduction, then cow is already out of the barn and the TPA ought to go ahead and accept it unless they can make their case citing specific language in the plan.
Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

#8 PLAN MAN

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Posted 11 April 2008 - 02:40 PM

Does changing the dates change anyone's answer?

Employee's entry date is January 1, 2008
Pay date is January 4, 2008
Payroll period is December 21, 2007 - December 28, 2007

Edited by PLAN MAN, 11 April 2008 - 03:59 PM.


#9 GMK

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Posted 11 April 2008 - 02:55 PM

Plan Man - It doesn't change my answer.

M. Schwing - you probably have already, but maybe one more look through the plan document to see if it mentions pay periods or pay dates with regard to when a participant actually begins participating and when election changes go into effect.

#10 rcline46

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Posted 11 April 2008 - 02:56 PM

Our counsel agrees with Janet. Constructive receipt is what counts and nothing else. Pay dates and not pay periods governs W-2 and all compensation definitions.

I would challenge the document and SPD that says 'first pay period after becoming a participant'. If you are paid monthly, you would be out a full month, and I believe that would violate maximum eligibility rules.

#11 WDIK

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Posted 11 April 2008 - 02:56 PM

Payroll period is December 21, 2007 - December 28, 20078


I also feel like I work over 6.5 million days during a pay period!
...but then again, What Do I Know?

#12 GMK

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Posted 11 April 2008 - 03:17 PM

Just wondering...

If the employee met the age 21 and 1 year of service requirements on January 25 and didn't become eligible until the quarterly entry date of April 1, would that violate the maximum eligibility rules? (even if she/he could defer as of the April 4 pay check)

#13 masteff

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Posted 11 April 2008 - 03:30 PM

Just wondering...

If the employee met the age 21 and 1 year of service requirements on January 25 and didn't become eligible until the quarterly entry date of April 1, would that violate the maximum eligibility rules? (even if she/he could defer as of the April 4 pay check)

No. Code section 410(a)(4), the actual admission date must occur no later than the earlier of 1) the first day of the first plan year beginning after satisfying age and service or 2) a date 6 months after satisfying age and service. This is why some plans use semi-annual entry dates.
Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

#14 BG5150

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Posted 14 April 2008 - 08:43 AM

Does changing the dates change anyone's answer?

Employee's entry date is January 1, 2008
Pay date is January 4, 2008
Payroll period is December 21, 2007 - December 28, 2007

What year is the W2 for that contains this payroll? 2007, no w/h. 2008, yes. That's my guess.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.


#15 GMK

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Posted 14 April 2008 - 03:20 PM

Thank you, masteff, for the information. It appears that maximum eligibility rules are not an issue in this discussion.

Deferrals are taken from paychecks, so they are always linked together in time and in calculations, regardless of pay periods. If a participant is eligible to defer from a paycheck issued 1/2/08 and the participant defers from that paycheck, then the deferral and the pay are part of the 2008 calculations, even if the pay is for work done in 2007. I don't think there's any argument about that.

The issue is whether or not a particular paycheck is eligible for deferral. I think the TPA would say, for example, that if the plan entry date is 4/1/08 and the check on 4/4/08 is for work done in March 08, then that check was a payment of compensation earned before the person was a participant, and so is not eligible for a deferral (assuming that was consistent with the plan document).

Approved prototype 401(k) plan documents include the 'You begin participating' option of 'on the first day of the payroll period on or after the date you meet eligibility.' Is this a risky option to choose? Is there other relevant guidance?

Thanks in advance for your comments (which can certainly wait until after Tuesday).

#16 John Feldt ERPA CPC QPA

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Posted 05 August 2008 - 04:00 PM

So, if a plan does not exclude bonuses, and a participant just now receives their 2007 bonus (cash flow issues), and they entered the plan only recently (July 1, 2008), would they be able to defer? Remember, the "payroll period" for which the work was done was long ago - 12/31/2007. I would argue that they can defer now on that bonus.

What about back-pay (assume the plan does not exclude it from its definitaion of compensation).

Also, if the "first few weeks" rule is applied to the plan, would that change the answer? (the Final 415 regs had something in there about using comp paid during the first few weeks following the end of the plan year - a nightmare for administrators, I know).

#17 Guest_named_Sieve_*

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Posted 05 August 2008 - 04:56 PM

I agree, J4FKBC: payroll period is irrelevant, as is the period of time when the services were performed. The issue is whether or not the pay "is not currently available". You can make an election with regard to all amounts that are not currently available "on the date of the election". It is a proper cash or deferred election even if the election relates to "amounts that would . . . become currently available after the . . . date on which the arrangement first becomes effective" (i.e., for services performed before the plan is even effective). (Treas. Reg. Section 1.401(k)-1(a)(2)(iii)(A).) As was said in an earlier post, constructive receipt is the issue--the rules do not allow you to change the tax nature of amounts which are constructively received, and you do not constructively receive a payment until you are entitled to receive it. Generally, you are not entitled to receive your pay for any period until the scheduled pay day, so an election before that pay day is effective. The regs say that amounts are not "currently available" if receipt cannot occur "before a particular time in the future" (e.g., before a scheduled payday). (Treas. Reg. Section 1.401(k)-1(a)(2)(iv).) Seems pretty clear cut to me. Back pay would be the same answer--not currently available at the time the election was signed, so deferral now is ok.

Edited by Sieve, 05 August 2008 - 04:57 PM.