Voluntary/Mandatory Contributions

[Guest SCHAEFM2]

I have been asked to research the incidence and discussion of defined benefit plans adding voluntary and/or involuntary contribution features to their plans. I have been asked for statistics, trends, and demographic information if possible. After researching numerous benefits links on the web, the only information I could find is that school systems and other public sector employers appear to be the main users of this feature. Does anyone have any better data? There are vendors who provide such plan designs, but I was unable to determine how common this design is. Any help would be much appreciated.

[AndyH]

Employee contributions to private sector DB plans must be after-tax, whereas Employee contributions to 401(k) plans may be pre-tax. For that reason, plus some TRA'86-era (if I recall correctly) aggressive regulations, private sector DB plans that require or allow employee contributions are nearly extinct.

[Guest RSNOW]

I have to agree with the above post. The government sector employees get special tax treatment with contributory (mandatory) DB contributions as the employee contributions are "picked up" by the employer (government entity) and are treated as employer contributions (pursuant to IRC 414(h)) for tax purposes, so they are pre-tax contributions. The private sector does not receive this tax treatment and employee contributions are after-tax. I believe this is a lobbying issue that ASPA has raised to treasury officials to level the playing field for the private sector on this issue. Bottom line is private sector don't have the tax advantages to encourage this type of program and given hassles and complexity of "cost-basis" tracking and recovery rules on after tax contributions, it isn't worth it and these plans seem to be almost extinct in the private sector.

[mwyatt]

I'd second that. The last private sector plan I can recall requiring employee contributions as a condition of participation ended the requirement in 1984. Most employees, given the prevalence of 401(k) plans, would not appreciate having to make after-tax contributions to a plan (plus the aforementioned basis recovery rules and the 120% Mid-Term interest credit greatly added to the complexity inherent in the plan. Finally, the 401(a)(4) and 401(a)(26) rules could pose some significant hurdles to maintaining such a plan if your lower paid employees took a pass on participating).