Do taxable bonuses to replace forfeited matches violate the IRC sec. 1.401(k)-1(e)(6) anti-conditioning rule?

[Luke Bailey]

If a 401(k) plan fails ADP, distributes the excess contributions as required to correct the failure, and in the process HCEs forfeit matches attributable to the distributed excess contributions, as they must, can the employer turn around and provide taxable (W-2 compensation) bonuses to the HCEs with the match forfeitures, for example exactly in the amounts of the individual match forfeitures, without violating the anticonditioning rule of Treas. reg. sec. 1.401(k)-1(e)(6)? Arguably this is OK, because the bonuses are not conditioned on the employee's making or not making the elective deferrals, but rather are conditioned only on some of the elective deferrals failing ADP, since in order for the bonuses to be paid, in the amounts they are paid, both (a) the HCE must have made the elective deferral, and (b) a portion of deferral must be distributed to correct an ADP failure. On the other hand, the employee would not receive the bonus if he or she had not made the deferral to begin with, albeit that the employee did not know at the time he or she made the deferral whether a portion would be returned to him or her as excess and result in a cash bonus rather than a 401(k) match. The reg says that the conditioning can't be "direct or indirect" (emphasis supplied), so maybe what I'm describing is "indirect" conditioning. On the other hand, what is being proposed here is very similar to what you can do with matching in a nonqualified spillover plan matched to your 401(k) plan, although the PLRs blessing those seem to be based on part on the language in 1.401(k)-1(e)(6)(iii) specifically dealing with nonqualified plans, so maybe they are distinguishable on that basis, and of course they are only PLRs anyway.

[Scott]

Luke,

What did you end up concluding on this one?  And what do you, or anyone else, think about the following situation?

Employer has a 401(k) plan with a 5-year graded vesting schedule for matching contributions.  Unbeknownst to the employer's plan folks (or benefit attorneys), a department head hiring an incoming HCE gave her an offer letter stating that her matching contributions would be immediately fully vested.  A year later, she notices on her plan statement that none of her matching contributions have vested and brings it to the attention of HR.  Having now learned about the arrangement, the plan folks tell the HCE this can't be done unless the plan is amended to provide for full and immediate vesting for everyone, which would be very costly and isn't going to happen.  She isn't budging.  Could the employer agree to pay her an amount outside the plan equal to any amount she forfeits if her employment terminates before her 5th anniversary?  It seems like it would violate the conditional benefit rule, but any thoughts are appreciated.