401k Contributions...Base or including OT

[Guest Nabrin]

Are there any issues with a company allowing contributions to a 401k plan from an employees base + OT earnings? Our company will only allow us to take our 401k contributions from our base pay.

I will have some more follow up questions, but this one seems like a good start.

Thanks in advance...

[QDROphile]

Depending on how the limit is implemented, the exclusion of OT could cause the definition of pay to be discriminatory. See section 414 of the Internal Reveune Code.

[Tom Poje]

A good example will suffice.

If both you and the owner deferred 5%, and he receives no OT, this could clearly be considered discriminatory. especially if there is a matching contribution involved. without more facts I wouldn't want to say more. There are other issues such as how many HCEs (those making more than 90000) there are and whether they have OT

[Guest Nabrin]

Depending on how the limit is implemented, the exclusion of OT could cause the definition of pay to be discriminatory. See section 414 of the Internal Reveune Code.

Let me try the abbreviated scenario on you.

Right now a couple of us are trying to determine if there is any way we can contribute more money to the 401k plan at work.

Here is the situation...

We are union. During the last contract negotiations, the company added the statement to the contract "allow contributions to the 401k to the maximum permitted by the IRS." They moved the % from 16 to 20 for allowed contributions. I immeadiately bumped up to 20%. My base pay is around 60k a year, but with OT included, last year it was almost 130k (yes...a LOT of OT).

Since my company will only allow me to take out 20% of my BASE pay, I was only able to put 12k into the program, but the IRS guidelines said 13k. At this time I had no idea what a HCE or NHCE was, or just about anything else to do with the 401k system for that matter. I only saw that I was going to be short $1000 towards the limit set by the IRS. Thats what started me doing some research.

Now I know that I am considered a HCE (although certianly at the bottom of the HCE ladder). What chaps me (and the others in my same situation) is that because we only can contribute 20% off of BASE salary, we are not able to hit that $13000 mark. However other HCEs that have higher BASE salaries, WILL be able to hit it using the 20%.

QRDO, I did read 414 and found an "answer" in the last section of it where it talks about compensation. But I was not able to determine "how the limit is implemented." Can you elaborate on what you are saying there? I may be off base, but it sounds as if you are saying that a 401k can be set up to include OR exclude OT in the compensation package. If that is the case, then how do I find out what the specifics of my companies plan are? Do I need to order the plan description (I think that is the name)?

Thats a few more questions than I wanted to ask in one post, but this has picqued my interest at work, and if I can somehow get a few more dollars into my pre-tax accounts, I will be pursuing it if you guys don't mind offering some guidance.

By the way...how in the world do you keep all of this straight?!!? Just that one section 414 made my head spin. Going in circles to the other sections it referred to didn't help either. Kudos to anyone that can figure it out!

Thanks for the answers so far...

[QDROphile]

Sorry I forgot to add the subsection reference. Section 414 is a doozy.

First, the bad news. If you are a highly compensated employee (HCE), the discrimination rules don't help you. In fact, limiting contributions of certain HCEs helps all the other HCEs with applicable tests.

From your description, it looks like the limits on elective deferrrals will cause the plan's definition of compensation to fail to be a safe harbor definition. In colloquial terms, it is unfair to use a definition of pay that is lower than real pay. Certain definitions are deemed to be fair, but those defintions are quite comprehensive. If a definition fails to be a safe harbor definition, then it call still pass if it is fair. The test looks at the average percentage of actual compensation that the plan considers for highly compensated employees and the average percentage of actual compensation the plan considers for nonhighly compensated employees. If the percentages differ by only a "de minimus" amount, the plan still passes.

SeeTreasury Regulation section 1.414(s)-1(d), and the test in (d)(3) in particular. But don't bother because there is more bad news.

The union group will be tested as if it had its own plan and union plans are treated as nondiscriminatory.

It looks like the qualification rules will not help you. Perhaps you have some hope in interpretation of the collective bargaining agreement. Although a plan limit is legal, there is very little reason these days for a 20% limit on elective deferrals. That limit was justifiable before a law change a few years ago, but not now. A deferral system that is based on base pay could be justified for administrative reasons, but the 20% limit is overly restrictive.

[Mike Preston]

Nabrin, a couple of points. First, with respect to 414(s) and the other things you are trying to tie together, the kudos go to you. Just for trying!

Second, although QDROphile already indicated that the IRS qualification rules won't help you because you are an HCE (translation: it is ok to discriminate in certain ways against HCE's), even if you weren't, the "base pay" versus "total pay" concept of 414(s) doesn't really apply in this situation. I'll spare you the technical run-down, but in the specific case of what a company defines as compensation solely for the purpose of determining where deferrals are allowed to come from, the definition of compensation merely has to be "reasonable". That is, it doesn't need to satisfy 414(s). Again, because you are an HCE, even if 414(s) applied in this case it wouldn't help YOU. So, enough about that.

However, your plan might be a bit behind the times and you might be able to goose the powers that be into updating it.

It is not necessary for your plan to provide you, since you are a collectively bargained employee, with the ability to make what are known as "catch-up" contributions. They are provided to participants who will be age 50 before the end of the year. Hence, for 2004, if your birthday is on or before 12/31/1954, you are said to be "catch-up eligible."

But check to see whether it does, anyway. For purposes of this discussion, it doesn't really matter whether you are catch-up eligible or not. The key is whether the plan allows for catch-up deferrals.

If it does allow catch-up contributions, then there are new regulations (effective for plan years that begin on or after 1/1/2004) that require a plan to implement one of two methods for allowing these "catch-up" contributions. A plan must satisfy one of these two methods if it wants to satisfy what is known as the "universal availability" rules that apply to "catch-up" contributions.

The first method is to modify the way that deferrals are elected so that if somebody is at the plan imposed limit (20% of base pay in your case), the plan must allow the participant to elect to put more in the plan in a way that will allow that participant to get the full "catch-up" for the year. The "catch-up" limit in 2004 is $3,000.

The second method is to ensure that the plan imposed limit is not less than 75% of whatever the plan uses to define compensation. If the plan imposed limit is 75% of pay (as opposed to the more restrictive 20% that your plan apparently has at the moment) or more, then it is not necessary for the plan to provide a participant with the opportunity to put in more than the plan imposed limit. At 75% of pay, somebody needs to make only $21,333 to be able to max out in 2004 ($13,000 regular deferral and $3,000 catch-up).

Most plans don't want to have a different way of determining deferrals for those under age 50. Hence, most plans (but certainly not all) are opting to increase their plan imposed limitations to 75% or more. As QDROphile pointed out, before 2002 there were good reasons to impose limits, like 20% of pay, to deferrals. However, after 2001 the law was changed and, typically, those limits no longer make sense to impose. That is why most plans are moving to the higher limit.

I need to caution you about something, though. The new regulations seem to exclude collectively bargained employees. They do so, however, in a way that leaves a little bit of doubt in some people's minds as to how to apply them. The specific regulation section is 1.414(v)-1(e)(2). It says:

"Certain employees disregarded. An applicable employer plan does not fail to satisfy the universal availability requirement of this paragraph (e) merely because employees described in section 410(b)(3) (e.g., collectively bargained employees) are not provided the opportunity to make catch-up contributions. "

The question then boils down to whether the rules applicable to universal availability apply in the case of a plan that DOES allow collectively bargained employees to make catch-up contributions.

The rules clearly allow a plan that covers collectively bargained employees to preclude catch-up contributions. However, if a plan allows catch-up contributions by collectively bargained employees, it is an open question as to whether the universal availability rules would force that plan to implement one of the two methods cited above for determining catch-up contributions.

At this point, you indeed need to get your hands on the governing document for the plan itself. That is the legal "plan document", which includes amendments that might be applicable. See if the plan allows catch-up contributions. If it does, see if it has implemented the "standard" language which increases the base from which deferrals are made from 20% to 75%.

It may be possible that the plan has been changed to reflect the new regulation, but that the administrative rules haven't been implemented, yet. If that is the case, if you point out that the plan now allows deferrals from a higher amount, you may be able to convince somebody to implement the new rules.

Of course, if the plan does not allow collectively bargained employees to make catch-up contributions at all, this doesn't mean much to you.

Keep us informed as to what you find out!

[Mike Preston]

Well, I just noticed that in another message you clarified that the plan does provide for catch-up contributions. It also appears to be implementing the first method to comply with universal availability. Oh, well. See my comment in the other thread.

[Guest Nabrin]

The union group will be tested as if it had its own plan and union plans are treated as nondiscriminatory.

Ok,

Thanks for the help so far guys...lets see if I can float some more questions that can be answered.

QDRO...your statement above...What do you mean by as if it has its own plan? I did run across this when I was wading through some of the links I found, but didn't fully comprehend it.

In our company there are several major blocks of employees...

Non-bargaining unit - 401k is different than ours with a completely different SPD...

Main Bargaining Unit (2400 employees) - same 401k plan as ours

My Bargaining Unit (31 empoloyees) - same as Main Bargaining Unit

When they are doing the tests, which groups are they comparing? Are we being compared to the Non-bargaining units 401k? We all work for the same company, but it would seem that since they have a different 401k plan description, then they would be tested separately than us.

Is it possible that the two bargaining units are lumped in the same test also? We are under completely different contracts, but our benefits are the same. Our group makes significantly more OT than the larger group...Most of our 31 people would fall into the HCE category due to making over 90k with OT. Probably only 15% of the 31 would fall under 90k.

Sorry about the disjointed thoughts...my goal is still to try to get to the 13k limit the IRS sets up...but which we cannot get to currently since we are limited to 20% of base pay which leaves us a little short. Not really sure where I am going to go with all of this info, but did you ever have the feeling that you know there is a solution to your problem, but you can't quite put your finger on it? Thats where I am right now...

Thanks,

Dave

[Lame Duck]

It's been quite a while since I worked with union plans, so my information may be outdated. Maybe someone else has more current knowledge. Have you looked at your collective bargaining agreement? Under the NLRB (I believe), benefits are a mandatory topic of discussion in collective bargaining agreements. It's possible that the CBA specifies both the compensation to be used in the plan and the percentage that can be deferred. In that case, the plan could not be amended unilaterally by your employer, even to improve benefits, as it would be a violation of the CBA. If that is the case, permission of the union would be required before the plan can be amended. It is also possible that your CBA says something to the effect that benefits will be the same as specified in the CBA of the main bargaining unit and you will need to check that agreement for benefit provisions, as well.

[QDROphile]

For testing purposes, plans may be aggregated or disaggregated, subject to the applicable rules. That means that two or more plans can be put together and tested as a single plan and a single plan can be broken into two or more units and the units tested separately rather than together. One common disaggregation is to separate a part of a plan that covers a unit of collective bargaining employees from the part that covers nonunion employees or a different bargaining unit. Sometimes a plan must be either aggregated or disaggregated for certain tests.

Once you look at the disaggregated bargaining unit as a separate plan for testing, you then often have special rules that say that the plan automatically passes. You don't even have to test.

Example: You have a plan that provides for a contribution of 5% of pay for nonunion employees and 4% for the collective bargaining employees. The plan will not fail the discrimination tests even if the nonunion employees have disproportionately more highly compensated employees because the plan can be disagrregated into a 5% plan and a 4% plan. Tested separately, each plan is not discriminatory.

These rules are complicated and different situations fall under different rules and have different outcomes.

I suggested that, despite the apparant discrimination, the plan might not have a qualification problem because you are in a bargaining unit. This is only a suggestion, because I have not tried to apply the rules to your specific situation.

[Guest Nabrin]

Our CBA doesn't specifically mention the 401k program...we just get whatever the company sets up with the main union in regards to benefits. They don't normally change anything in the benefits area except during the negotiations year.

Is there a way that I can tell what system our HR guys are using when they do the test? Or would that be material that is "off-limits" for those that "aren't in the know"?

[QDROphile]

It seems to me that you are getting into a lot of complicated stuff indirectly and all that complicated stuff will not make any difference in the end. Why don't you just ask the plan administrator to explain to you why OT is excluded and why there is a 20% limit in the plan?

I can imagine only a few answers that are reasonable from a policy perspective, and even those are weak. I can imagine more answers about exclusion of OT with respect to contributions that are not elective deferrals (e.g. matching contributions or other employer contributions) because inclusion of OT will increase the cost of benefits to the employer. But for elective deferrals, allowing you to increase deferrals does not increase the cost of contributions. A more liberal policy might be more complicated and increase administrative cost.