Company-paid pension and profit-sharing distributions

[Guest Carma Christensen]

Our pension plan requires an employer contribution of 11.11% on all taxable compensation. Employee contributions

are not allowed.

At the end of the year, the Company sets aside a dollar amount of company profits for a profit-sharing distribution,

which is distributed during the next calendar year. The amount set aside is distributed as 10% pension and the

remainder in taxes and cash.

Two questions:

1) Do we need to do anything in our internal bookkeeping to ensure this will considered an "employer contribution"

rather than an "employee contribution"?

2) We are considering giving employees the option of contributing profit-sharing amounts to the company 401(k)

instead. Some managers feel employees should get the same gross amount for a 401(k) contribution as if they took

cash and pension. Accounting is concerned that this methodology could indicate that the employee had control in

making the contribution, making it an employee contribution rather than company. Do you see that as being an

issue?

[E as in ERISA]

This isn't really an issue of employer contribution v. employee contribution. It is really an issue of the definition of compensation -- i.e., what is included in taxable compensation.

1) Unless there are facts missing, the current contribution is an employer contribution. You have a profit sharing program that pays out in cash (i.e., it's not a qualified plan). The company calculates how much it wants to set aside each year (e.g., $100,000). The program provides that 90% of the amount is paid to the employees in taxable cash (e.g., $90,000). The other 10% automatically goes into the qualified pension plan without any election on the part of the employees (e.g., $10,000). This formula satisfies the requirement that the employer make a pension contribution equal to 11.11% of the $90,000 additional taxable cash.

2) Giving employees the option of contributing some of the profit sharing amounts would complicate things, because of the fact that the employer contribution is based on taxable compensation. If employees reduce their taxable compensation by making a 401(k) contribution, they will also reduce the amount of employer pension contribution that they receive. Example. Employee currently receives $90 profit sharing in cash and $10 in pension plan. If employee makes a 401(k) contribution of $45 of the profit sharing, then the employee will only get $5 in the pension plan, because the pension contribution is 11.11% of TAXABLE compensation.

It sounds like the managers want to make sure that the employee will be made whole for the other $5. Would they consider changing the definition of compensation to taxable compensation PLUS profit sharing bonus? (That is not a safe harbor definition). Note employees who are deferring portions of their regular compensation may already be losing out on part of their employer contribution. (An employee who makes $20,000 regular wages and contributes $2,000 to the 401(k) is already losing 222 of the employer contribution to the pension).