414(s) Compensation from date of deferrals

[rcline46]

The plan document states that the employer may use compensations from the date an employee became a participant in the 401(k) portion of the plan.

Plan effective date is January 1, 2004. Plan is signed May 15, 2004. Deferrals actually started on August 1, 2004. There is NO special effective date for deferrals in the document.

It is a fact that deferrals cannot begin before the document is executed, so a valid 414(s) pay would be from May 15th. The question is, since no one could defer prior to 8/1/2004, is compensation from 8/1/2004 also valid under 414(s)? The arguement is that this is the earliest anyone could actually be eligible to defer.

Opinions?

[WDIK]

I would not be inclined to use the August date absence such applicable language in the plan document. I would not consider being eligibile to defer for plan purposes the same as being able (or unable) to defer for administrative reasons.

[rcline46]

WDIK - That is an interesting position. Remember that we are discussing 414(s) compensation, and the rules are that it must be non-discriminatory in nature and applied uniformly. Also, the document must permit the use of 414(s) comp (and it does). (Corbel document, no language modifications).

Since you are disinclined to use to pay from 8/1, could you elaborate a bit more as to why? This is a self-directed plan and the procedures for self direction (which are required) were not in place any earlier. Does this change your mind?

[WDIK]

Since you are disinclined to use to pay from 8/1, could you elaborate a bit more as to why?

Where I kept getting stuck in my thought process is that

the employer may use compensations from the date an employee became a participant in the 401(k) portion of the plan

and that

there is NO special effective date for deferrals in the document.

When does an employee become a participant in the 401(k) portion of the plan? It seems to me that it would be at the time such employee becomes a participant in the plan in general since the document does not address that issue.

I did not really think about whether or not compensation from 8/1 was valid under 414(s) since it seemed such an option was not available based on the language described in the plan.

[rcline46]

Well, let us try to determine when the employee first becomes eligible for the 401(k) portion of the plan. I maintain that this could not be before May 15th when the plan was signed, even though the plan was effective on January 1. This is based on rule that they could not defer before the document was signed. Do we at least agree on that?

[WDIK]

It would be difficult for me to argue that a participant was eligible to defer before the plan was in place.

What language does the document have regarding entry dates?

[rcline46]

The entry dates are quarterly following 1 year of service. Note that this plan is NOT self-directed! It just took that long from date of signing the document to getting the meetings done and collecting the deferral forms.

[WDIK]

So the possible dates to consider an employee a participant in the 401(k) portion of the plan are:

1) May 15, 2004

2) July 1, 2004

3) August 1, 2004

Number one certainly seems reasonable.

Number two doesn't necessarily make sense since employees with a year of service prior to the execution date could have been eligible to defer prior to 7/1.

Number three is based on the argument that employees cannot be considered participants in the 401(k) portion until deferrals can actually be processed. This appears somewhat arbitary as many factors could either accelerate or delay the process. Was there anything that actually communicated to the employees that their deferrals would/could not start prior to August 1st? It seems that at least some employees could have made elections well prior to August 1st, and based on the plan document alone, deferrals should already have been withheld.

[namealreadyinuse]

#3. They weren't eligible to participate until they were offered the opportunity. However, does the plan really say "employer may use"?? The discretion there bothers me.

[rcline46]

Yes, the plan says that - standard language in the Corbel VS document, and permitted under 414s.

WDIK, I will check on what the employees were told!

[rcline46]

WDIK - the employer told the employees that deferrals would not start until August 1 in their meetings. Does that change your decision.

[WDIK]

That information does soften my opinion.

If that information were in writing, it would further soften my opinion.

If that information were in the plan document, it would soften my opinion like butter on a hot tin roof.