Employer contribution by salary reduction

[spiritrider]

It seems to me that I remember seeing 401k plans where there were "employer" contributions by salary reduction.  However, I can find no cite or reference for this.

The employee signs a employment contract that specified that they would not receive a percentage of their compensation. It would instead be deposited into the 401k plan and not considered an employee deferral. Essentially, the employee is making the contribution, but it is not employee deferral and it is not a contribution from employer funds.

Anyone care to comment if I am getting senile or if not, any cites or references to some substantial authority. 

[Kevin C]

I think you are looking for 1.401(k)-1(a)(4)(ii). But, I don't see that it helps you.

However, unless that contract is a one-time irrevocable election as described in 1.401(k) -1(a)(3)(v), the contract you describe meets the definition of a cash or deferred election under 1.401(k)-1(a)(3)(i) and the contributions are salary deferrals.

[BG5150]

...and they are subject to the 402(g) limit.

[CuseFan]

So, if one-time irrevocable election - not a salary deferral, but an "employer" contribution so still counts toward 415 limit. This is also the case if such contribution is a condition of employment. I have a client that requires all employees upon becoming eligible must, as a condition of continued employment, contribute 5% of pay to the plan and such amount is not considered a salary deferral for plan purposes (not sure about payroll tax purposes). Otherwise, salary deferral and all the baggage that goes with it.

[Larry Starr]

21 hours ago, spiritrider said:

It seems to me that I remember seeing 401k plans where there were "employer" contributions by salary reduction.  However, I can find no cite or reference for this.

The employee signs a employment contract that specified that they would not receive a percentage of their compensation. It would instead be deposited into the 401k plan and not considered an employee deferral. Essentially, the employee is making the contribution, but it is not employee deferral and it is not a contribution from employer funds.

Anyone care to comment if I am getting senile or if not, any cites or references to some substantial authority. 

This is done all the time, particularly in professional practices, but not the way you say because that will cause problems.  The way our clients do it is to negotiate an employment agreement that includes a compensation package and which makes clear that the compensation package INCLUDES any ancillary items, such as employer contributions to the retirement plan, group medical insurance premiums,  car allowance/lease, (for docs at least) CME (which is continuing medical education), etc.  

So now, totally separate from the employment agreement, let's say we have a 401(k) plan that is set up to maximize the HCEs. The employer contribution is part of the compensation package, so the take home pay is a smaller amount than it would otherwise be.  This is NOT a 401(k) deferral, and it is not the one time election mentioned in the other response.  And if the new doc doesn't want any contribution because she wants to pay off some of her medical school loans, then fine, we amend the plan to either limit her to some low number that she would like, or limit her to zero (maybe, except for real 401(k) deferrals).  This is an employer level plan decision, not a participant decision, so it's not a 401(k) deferral and not subject to the 402(g) limit.  The employer is not required to do this and in fact, in some situations, the employee will still get, say, the gateway if we need that contribution made.  We control these amounts by plan amendment, not participant election; we have some law firms where we do an annual amendment for the following year where every partner is limited to some fixed dollar amount of employer contribution (except for those who are maximizing).

[spiritrider]

Thanks Larry, at least I'm not senile (yet).

Are there any provisions of the tax code, IRS regulations or guidance that directly support this or is it one of those many things that is by multiple inference.

[QDROphile]

It is done with a wink, wink, nod, nod.

[Bill Presson]

3 hours ago, spiritrider said:

Thanks Larry, at least I'm not senile (yet).

Are there any provisions of the tax code, IRS regulations or guidance that directly support this or is it one of those many things that is by multiple inference.

A very smart person told me today, "The regs tell you what you can't do and what you must do. They don't tell you what you can do."

And that is where this lies, I believe.