Jump to content

Plan Contribution in Lieu of a Raise


DTH

Recommended Posts

A governmental employer gives a 5% employer contribution into their 457(b) plan. The employer wants to give employees the option of receiving a 2% raise or in lieu of a raise the employer will put an additional 3% employer contribution into the plan. Thus, employees who elect their raise will get a 5% employer contribution and employees who elect no raise will get a 8% contribution.

My gut tells me this may be against state labor.

Has anyone see a governmental employer do this?

Link to comment
Share on other sites

Has the employer's lawyer evaluated whether State and local law grants the employer to make a contribution beyond elective-deferral salary-reduction contributions?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

Link to comment
Share on other sites

In a 457(b) plan the employee pre-tax/Roth deferral contributions are added together with employer contributions towards the 457(e)(15) limit. So the deferral limit could come into play. If the combined employee/employer contribution is more than the IRS limit the employee would have an excess deferral that needs to be distributed from the plan.

These plans are not subject to IRS nondiscrimination testing so the employer can give different rates of employer contributions to different groups.

The question is really about pay raises and if the employer can give employees to option of getting a raise or in lieu of the raise get a higher rate of employer contribution.

I know an issue had come up with governmental 403(b) plans where an employer gave employees the option of medical coverage or getting the employer's portion in cash. The employer can't allow employee's who elected the cash option to have the option of taking cash or putting the cash into a 403(b) plan. This seems to be a similar scenario.

Link to comment
Share on other sites

short answer to this question- Since almost all govt employees are covered by a collective bargaining agreement, review the agreement to determine if the employee can opt out of being paid a raise if it is contributed to a 457b plan. Most govt CBA mandate that employees must receive the raise in their paycheck. However, employee could elect to defer the raise as a 457b contribution. whether the employer can give an additional 1% if employee elects to defer raise is a matter covered under state labor law.

mjb

Link to comment
Share on other sites

Since almost all govt employees are covered by a collective bargaining agreement...

Whoa there cowboy. Not even close to "almost all", at least not in the SouthEast US.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...