401(k) -- Contingent Benefit Rule Violated

[Guest mrjones]

Employer with a 401(k) plan began providing a mathcing contribution Jan 1 this year, maximum match equals 3% of compensation. At the same time he reduced the contributions in his Section 125 plan by 3%. Predictably, the employees complained.

His "solution" was to provide the reduced 125 benefit to everybody, with an extra 3% going to those who don't defer into the 401(k) and thus receive no match; lesser extra amounts to those who receive a match that's less than the maximum. Essentially, the more an employee defers to the 401(k) plan, the less of the extra 3% he receives in the Section 125 plan. This seems to be a clear violation of the contingent benefit rule in section 401(k)(4)(a). But what would be the least painful yet appropriate correction?