What will they think of next?

[Santo Gold]

Can't believe the creativity people have when designing 401(k) plans. Here's a new one: Can a company establish a 401(k) plan such that participants can only make elective deferrals once a quarter? They have bi-monthly payroll and I assume participants would have $0.00 deferrals in 5 out of the 6 quarterly payrolls. Then, with payroll #6, they would have a set amount withheld. Participants choice as to whether they want to have 3 months worth of contributions taken out in that last payroll, or have some other fixed amount withheld.

I really don't know why they would want to do this, but I assume the employer thinks it will cut down on admin time for his HR person. Despite the nonsense of the whole idea, do you see anything "wrong" with it?

[Guest Pensions in Paradise]

Sorry, won't pass the benefits/rights/features test. Let's say I'm a NHCE making $24,000 a year. 24 pay periods a year, so I make $1,000 a pay period. Now let's say I want to defer $8,000 a year. Under your proposal, I would only be able to defer $4,000 a year (i.e., one paycheck a quarter for four quarters). This could discriminate against NHCE.

[Nate X]

First, I’d like to say. These are my favorite questions.

Once the money is made currently available to the participant, he/she can no longer defer on it. So in your example, 5 of the 6 payrolls would be considered excludable comp for 401(k) purposes.

Exclusions from comp are usually based on certain types (i.e. Bonuses). The compensation used must be reasonable, and may not exclude a certain percentage of the employee’s comp.

Based on your example, it appears that the company would be excluding a percentage of employee’s compensation (approx. 83.33%).

If the compensation excluded used was considered reasonable (again I don't think it is), then you could potentially use this if is passes non-discrimination testing for (1) the excluded compensation, and (2) the amount available to defer. Simply because the plan limits the amount a participant can defer is not discriminatory in-and-of-itself.

[austin3515]

As long as 83% of the HCE's comp is being excluded as well, that wouldn't necessarily be an issue. That beig said, this CLEARLY discriminates against the NHCE's, as PIP mentioned.

I wouldn't even consider this plan design without IRS approval. Personally, I wouldn't waste my money on the application.

[Kevin C]

I agree with Nate that it would not be a reasonable definition of compensation.

1.414(s)-1(d)(2)(iii) Limits on the amount excluded from compensation. --A definition of compensation is not reasonable if it provides that each employee's compensation is a specified portion of the employee's compensation measured for the otherwise applicable determination period under another definition. For example, a definition of compensation that specifically limits each employee's compensation for a determination period to 95 percent of the employee's compensation using a definition provided in paragraph © of this section is not reasonable. Similarly, a definition of compensation that limits each employee's compensation used to satisfy an applicable provision with a 12-month determination period to compensation under a definition provided in paragraph © of this section for one month is not a reasonable definition of compensation. However, a definition of compensation is not unreasonable merely because it excludes all compensation in excess of a specified dollar amount.

[austin3515]

I thought about quoting those regs, but you don't HAVE to use a 414(s) definition to calculate deferrals - you need to use 414(s) for testing purposes...