Employment contract vs Discretionary

[Guest EllenD]

I'm new to 401Ks having just set up a new plan at a new company and having no 401K experience so please bear with me.

At my employer's instruction, I set up a plan with no matching but leaving the window open for future matching. I have told all employees that we will review matching when we get a clearer idea of this year's financial situation.

Now I have heard from one of our first employees that our boss signed a contract with him giving him a 3% match. My boss says that we can do this for him but not for the others because an Employment contract trumps other rules. Is this right that we don't have to treat everyone equally? Doesn't seem right to me. Expert advice please.

[QDROphile]

You have to follow the terms of the plan. If the plan provides that matching contributions can be made for this employee, then it can be done, subject to the relevant qualification rules. If the plan terms do not provide for the difference in match relative to others, and others don't get the match, then the contribution will disqualify the plan. The wording of the provision for the special match might be interesting.

Qualified plans are not bridge games. You don't get to declare trump, even if you win the bid.

[Guest EllenD]

You have to follow the terms of the plan. If the plan provides that matching contributions can be made for this employee, then it can be done, subject to the relevant qualification rules. If the plan terms do not provide for the difference in match relative to others, and others don't get the match, then the contribution will disqualify the plan. The wording of the provision for the special match might be interesting.

Qualified plans are not bridge games. You don't get to declare trump, even if you win the bid.

[austin3515]

I think we all THINK we're experts

If this employee is an HCE (i.e. if he/she earned more than 100,000 in 2006) then this is a definite no-go.

I don't think you can specify that "individuals for whom a match was negotiated in their employment contract will get the match, but no one else will" because a Plan must provide for a definite allocation of contributions (i.e., based on objective criteria). I suppose a super aggressive position would be that this does meet that requirement but I hugely doubt it.

What's more, there's no way your plan document provides for this today, and you have to follow the terms of the Plan. Depending on how the document reads you may still be able to amend it for 2007 (i.e. if participants must be employed on the ).

[Guest EllenD]

Thank you. Yes the employee is one of the highest paid - over $100,000. Natch. Janitors usually don't get to negotiate employment contracts and set terms.

So if my boss goes ahead this could/would nullify our 401K plan? (I hope, because from a practical point of view it certainly would be 1- unfair and 2- downright dumb (unless you believe that employees never talk to each other).

Sorry for the repeat in the thread - I'm a newbie.

[david rigby]

The first sentence from Qdrophile is the key. Federal regulators are not particularly happy to see violations of this. Of course, this is the reason ERISA required a plan to be a written document. Perhaps you can mention this point to your management.

As stated, you may be able to amend the plan prospectively.

[Guest Pensions in Paradise]

Lets assume for a second you could amend the plan to provide a matching contribution strictly for the one HCE. The fun part will be watching the faces of your other employees when they read in the Summary Plan Description that only the one HCE receives a matching contribution!!! Because you will be required to disclose that in the SPD.

[masteff]

So if my boss goes ahead, this could/would nullify our 401K plan?

Assuming you amended the plan to allow only this EE to get match, then since EE is an HCE, it goes back to nondiscrimination testing (ACP test under 401(m)). Since NHCE's have an average rate of zero, then to best of my understanding, HCE's are limited to zero ("basic test" is 125% of NHCE rate, "alternative test" is lesser of plus-2 or 2-times over the NHCE rate, all of which start from zero). So yes, giving match to this EE alone would violate nondiscrimination.

Two possible fixes require giving contributions to other employees.

1) If you did as commented above and make a special amendment to allow this EE to have a special match rate, the company could give 1-2% match to other employees. Then under the alternative test, the HCE rate would be equal or less than 2-times the NHCE rate. (Exact amount of match required would depend on number and participation rate of HCE's vs NHCE's.)

2) Start out as in 1, but instead of giving match to the other employees during the year, wait until during discrimination testing to determine the minimum amount of match give to NHCE's. (I'd discuss w/ your TPA or whomever would do the testing to determine how much extra administrative burden this would create.)

Another possible fix would be to start a non-qualified plan to allow this EE to receive match based on his contributions to the qualified plan. (But a non-qual plan can be relatively expensive to set up and maintain, especially for one EE.)

One other thing to look into... allowing NHCE's to make after-tax contributions, since those fall into the ACP test as well.

[Locust]

Do you have a recordkeeper (third party administrator) for the Plan? I hope you do.

If so, an easy way for you to get this resolved would be to send the issue to the recordkeeper, and the recordkeeper will confirm that this can't be done. I expect that the boss will then go to the employee, explain the issue, and give the employee an extra 3% of pay.

[JanetM]

Also keep in mind if you do non qual for this benefit it will be subject to 409A. Very bad and expensive if you mess up.

Why not just give the guy the 3% (grosed up if the amount was to have been to the plan). He can put it into IRA or Roth IRA.

Boss was wrong, EE contract doesn't trump plan.