One time election for additional contributions to DC Plan

[Guest PALAWYER]

Government DC Plan is a Money Purchase plan- employer contributes x% and Employee is required to contribute x% (these are considered pick-up employer contributions). Employees get a bonus at the end of the year and employer would like to amend the plan to allow employees to make a one-time irrevocable election to defer all or a portion of any bonus amount into the MP plan. Can you do this? Can employee make election for each bonus each year (I don' think so). Can this be part of a Government MP Plan at all?

[Carol V. Calhoun]

A number of private rulings have allowed one-time elections into or out of defined benefit plans that require employee contributions, or one-time elections as to the level of participation, so this should be acceptable if it is a one-time election. However, if it is more than one-time, it may well be treated as an impermissible cash or deferred arrangement, and thus the employee's contributions would be after-tax.

Although a one-time election would appear to be permissible, provided that applicable state and local law allow it, I would be very careful with this one. Our experience has been that this causes so many employee relations/bad publicity problems that it may not be worth it. For example, suppose that an employee starts with a high contribution rate, then needs the money for urgent medical care of a seriously ill family member. Do you really want to be the one to tell the employee (and/or the local newspaper) that the employee cannot change his or her election due to an obscure tax rule?

Also, an IRS official has indicated informally that the IRS is considering whether contributions under such arrangements may be subject to Social Security taxes in Social Security states, or to Medicare taxes, even if they are not subject to income taxes. No definitive word, yet, but it's something to keep in mind.