Can someone clarify?

[Guest jhilliard]

I have a client with a profit-sharing plan; a long time employee asked the sponsor if he could take his portion of the PS allocation as cash rather than having it contributed to the plan. Does anyone know how this could be incorporated? What effect will this have on testing?

Any ideas would be helpful.

Thanks

[chris]

Add a 401(k) component.... I don't do any testing work, but I don't see how one e/ee will be able to request the $$$$ in hand, much less the plan's ability to honor such a request without a 401(k) arrangement in place. To do so would be operating the plan not in accordance with the plan document, ie, allocation formula.

[Guest dwaling]

If the long time employee wants cash, he needs to ask for a raise. If you add this feature for one employee, you would be running afoul of the Treasury Regulations. Doing this appears to violate Treasury Regulations 1.401(k)-1(a)(2), 1(a)(3), 1(e)(2) and (1(e)(6). This would make it an unqualified CODA Cash or deferred Arrangement. Not a good idea.

As the other person stated, the employer could change their plan to add a 401(k) CODA with or without match, but, the testing could get expensive and does not really seem to address what the one employee wants.

Another option might be to amend the plan for in-service distributions and let the employee take a distribution. This could serve the purpose. However, it would have to be open to everyone.

Unless the long-term employee is an owner or otherwise highly compensated and the employer wants to be cross-tested, it would appear there is no way to do this. If the employee is given the option of receiving the profit sharing contribution or as a wage, you set up a cash or deferred arrangement.

Dwaling

[k man]

the irs might apply the deemed coda regs. you cant give an employee a choice to put his profit sharing in the plan or take it in cash.

[Guest JimD]

I agree with Chris where the employer could add a CODA provision and give all participants the option of taking all or a portion of the employers designated CODA contibution in cash or defer it into the plan. This design probably is contrary to the employers goal of sponsoring a retirement plan for their employees if they allow them to take cash. ADP testing has to be done. Worse case scenario, all NHCE's take cash and only the owner defers-ADP fails and owner gets a refund of the contribution.

[david rigby]

I'll take a contrary position, at least a little (surprise).

Ditto the comments about CODA. But there is a more basic issue: why does the plan exist? If the plan sponsor has created this as a capital accumulation plan, then that is why a PS contribution is made in the first place, and changing the design to allow in-service distributions is a very significant change in philosophy. Tread lightly, and change the plan only after the sponsor has considered all the ramifications.

If needed, I'm sure my employer can provide some consulting advice.

[K-t-F]

My feeling towards pension contributions is that it is the gravy added on top of the beef (their compensation).... While it is their money once fully vested and they retire (or terminate), it is not their money until then. It is $$ that the EE would never have seen if there wasn't a plan at all. For an employee to ask for their contribution as compensation instead of adding it to the plan is an honest question. What the EE doest't know is that a plan has certain rules that it must follow for it to be in existance at all. To honor their request is asking alot, taking into consderation possible fallout like other EEs wanting to follow suit, in addition to the administration expenses to provide the EE that option.

I know this doesnt offer a solution to your problem... It is just what I tell a client who has an EE with the same desire. I also tell the sponsor if the EE needs more compensation, give them a raise. That usually ends the conversation and the EE is told it can't be done. Just about everyone lives beyond their means....

On a side question... has anyone seen this as a common question lately? My clients are small closly held PCs with between 3-5 EEs. I have been asked this same question more frequently than in past years. The economy could be fueling this desire by EEs to have their $$ now rather than later (to make ends meet)

[david rigby]

Let's not forget tax implications. The PS contribution is tax-deferred when made and while in the plan. But it is permanently exempt from SS tax.