Another Benefit Is Contingent on 401(k) Deferrals

[Guest mrjones]

Howdy Folks-- I had this posted on "Correcting Plan Defects"...quite a few people read it, but never got a single response. Maybe I will here.

A client with a 401(k) plan began providing a matching contribution Jan 1 this year, with the maximum match equaling 3% of compensation. At the same time he reduced contributions in his Section 125 plan by 3%. When the employees complained, he decided to provide an additional 3% in the 125 plan for employees who make no 401(k) contributions (and thus get no match). His thinking was that this way everybody will get 3%, either in the 125 plan or in the form of a matching contribution in the 401(k) plan (or a combination of the two, for those who receive a match that's less than the maximum).

Since this makes an employee's benefit in the Section 125 plan contingent on the amount he contributes to the 401(k), it's a clear violation of the contingent benefit rule in section 401(k)(4)(a). But what would be the least painful yet appropriate correction for what has already happened the first half of this year?

[spartytax]

Was this resolved? What correction did you come up with?