Contribution Required by Employment Contract - What is It?

[rocknrolls2]

Company X requires employees performing certain functions to sign a contract providing that upon their satisfaction of the eligibility requirements to participate in the X Profit Sharing Plan, the employee will receive 90% of the amount s/he has earned working in the stated function. The contribution is treated by X as an employer contribution and is thus not included in the employee's gross income at the time it is made. Sometimes an X employee will perform an unrelated function before being transferred into the function requiring the signing of the contract. I am very concerned on how this contribution should be treated for tax purposes, because any of such possible treatments have vastly different tax consequences. Here are the three alternative ways I see this contribution being treated:

(1) For those employees who previously worked for X in another capacity, I can see the contribution being treated as either (a) a 401(k) contributions, since it is made under a cash or deferred arrangement (since it fell outside of the one-time irrevocable election exception) for which ADP testing would be required or (b) a mandatory employee contribution which would be subject to ACP testing.

(2) For those employees who had to sign the contract at the time they were initially hired by X, I can see the following possibilities: (a) the contribution is an employer contribution since it was made under the one-time irrevocable election rule; or (b) the contribution is a mandatory employee contribution, subject to ACP testing. For (a), unless the contribution could satisfy a safe harbor, the contribution would have to be subject to the general test to determine whether it satisfies the nondiscrimination test for the amount of such contributions.

Any thoughts?

[Below Ground]

Sounds like a nonqualified plan.

[david rigby]

"...since it is made under a cash or deferred arrangement..."

Where is the cash option?

BTW, what does the plan say?