Elective vs non-elective question

[Guest Carma Christensen]

Please forgive what is probably a very simple question, but I want to make sure I'm clear on withholding before I close payroll and I have a 401(k) question.

Scenario: S-Corp has 401(k) plan that was used a couple of years ago for non-elective profit-sharing for members (Company also has money purchase pension which has defined contribution). Since then it has been used only for owners. Owners say funds contributed are non-elective and should not be taxed. Issue is if it is elective or non-elective since it is only dispensed to certain individuals, all of whom are owners/dependents. (Incidentally, Top-heavy is ok because it is balanced by money-purchase pension.)

[Mike Preston]

If the money was contributed to the 401(k) plan, the question is what form of contribution was made? If it was a non-elective contribution, then the allocation of that money will be pursuant to the plan document provision that details who gets what portion of the non-elective contribution.

What does the plan say happens to non-elective contributions? Are the funds being allocated consistent with the plan language?

[Guest Carma Christensen]

(Sorry for the delay--back from vacation). I think this would fit under "Qualified non-elective Contributions", which says in the plan ". . .it is subject to distribution and nonforfeitability requirements of Code 401(k). . ." and ". . ."Employer may make contribution on behalf of participants in amount sufficient to satisfy ADP/ACP Test to extent permitted in Section 1.2 and Section 1.10."

The issue is probably distribution requirements of 401(k), which I'm not sure of. My third-party administrator says if non-elective contributions are made, they must be to all participants and cannot be discretionary. I need better info before I take it to my boss, though, because if that is the case, she won't be happy about it.

[Mike Preston]

Sounds like your third-party administrator is on the ball on this one. It would be a most unusual document that allowed QNEC's to be made to targeted owners.

[AndyH]

Let me guess, now, a medical practice? Those bosses are always unhappy when employees get contributions!

Yeah, I admit it; the word "dispensed" had something to do with my guess.