Participant-directed employer contributions

[Guest bsl120]

Hi all...

I have a situation where the college has a 403(b) and a 401(k) for all employees. The employer wants to make contributions to the employees and allow the employees to determine which account recieves them. Any problems?? I guess the real issue is whether there are "employee directed employer contributions"?

[Guest Yanikoski]

It seems like no one wants to tackle this one, so I'll give it a try. Maybe if I raise a few issues for further consideration, others will jump in.

First, I have to say that I have never heard of this kind of arrangement, though perhaps others have. If it has been done successfully, or if it has been attempted and failed, then either would answer the question.

Second, it certainly is important that the employee would have only the right to direct the contributions to one plan or another, not to take the amount in cash. It would clearly be improper in the latter case, and the contribution would be construed to be an elective deferral by the participant. However, it might still be considered as such, if the employee has any control over the funds at all. The IRS could argue that even though it was not elective THAT a contribution was made, it was elective WHERE it was made. I'm not sure they would care to make that argument even if they thought it had merit, but I am also not sure that they wouldn't.

Third, 401(k) and 403(b) plans have different non-discrimination testing methods, and each plan is tested separately. The employer could be providing the same amount to everyone, but if the wrong pattern of individual choices were made as to where the funds went, one of the plans could easily fail the test. I would think this would be less likely to be a problem in a very large organization, where presumably things would be more likely to even out. But even there, it could be a problem depending on the history of the plans and the habits of the participants. In the education sector, for example, everyone is used to 403(b) plans, and everyone might share a comfort bias in that direction. But in the hospital market, if employees have always had a 403(b), and the 401(k) is relatively new, the rank and file might have that same comfort bias toward 403(b), but the higher level people might be more mobile and might have more experience with 401(k) plans -- perhaps preferring to roll their old plan in, or anticipate rolling their new plan out when they move to their next job at a for-profit hospital. Hard to guess, but there does seem to be some risk there.