401K Profit Sharing & Eligible Participant Regulations

[Guest klsconsulting]

According to IRS regulations, must a discretionary 401K profit sharing contribution be given to current 401K participants contributing to the plan or all eligible participants, whether they are contributing to the plan or not? This is outside of hours of service requirements/eligibility.

[Tom Poje]

if the plan is 'top-heavy' then it is required to provide a minimum contribution (usually 3%) to all participants who are active as of the last day.

otherwise, the term discretionary means exactly that, its an option.

[four01kman]

As I understand the question, the plan provides for employee deferrals and discretionary employer contributions. It is possible to have different eligibility requirements for each, provided they meet the minimum requirements set forth by the law and regulations.

[JanetM]

Sure, any type of contribution can have its own eligibility and vesting. Save those safe harbor contributions that impose them. Be careful that you don't make it so complex that it could be problems down the line.

[Guest klsconsulting]

As I understand the question, the plan provides for employee deferrals and discretionary employer contributions. It is possible to have different eligibility requirements for each, provided they meet the minimum requirements set forth by the law and regulations.

Yes, that is correct. I just want to make sure that my 401k administrator is advising me correctly. They are stating that the discretionary profit sharing must be given to all eligible particpants, wheter they are deferring contributions or not, according to IRS regualtion and not my adoption agreement elections. So, they are stating that if an eligible participant declines to participate in deferring money for retirement, they will still need to enroll in the plan to receive the discretionary profit sharing. Does this sound correct?

[masteff]

they are stating that if an eligible participant declines to participate in deferring money for retirement, they will still need to enroll in the plan to receive the discretionary profit sharing.

What do they/you mean by "enroll" in the plan? Yes, they have to be an eligible participant in the plan, but no, they don't have to sign up for deferrals to get profit sharing (because then it would be a match and not a profit share). The non-contributing participants would still want to set up investment elections and complete beneficiary designation forms.

Perhaps what you're looking for is more like an annual discretionary match? I guess we need to know a little more about what you're wanting to do versus what the TPA says you have to do.

[Kimberly S]

if the plan is 'top-heavy' then it is required to provide a minimum contribution (usually 3%) to all participants who are active as of the last day.

otherwise, the term discretionary means exactly that, its an option.

True, but if the discretionary match calls for allocations to all participants, then the only discretion is to make a contribution or not and how much, rather than who gets it. There are many clients who don't understand that distinction, nor do they understand the fact that someone who has elected zero deferrals is still a "participant."

[BG5150]

As I see this question: you must give the profit sharing contribution to everyone who has satisfied the profit sharing eligiblity requirements and heve entered the plan. Making, or not making, salary deferral contributions has nothing to do with it.

[PLAN MAN]

To quote you: "Yes, that is correct. I just want to make sure that my 401k administrator is advising me correctly. They are stating that the discretionary profit sharing must be given to all eligible particpants, wheter they are deferring contributions or not, according to IRS regualtion and not my adoption agreement elections. So, they are stating that if an eligible participant declines to participate in deferring money for retirement, they will still need to enroll in the plan to receive the discretionary profit sharing. Does this sound correct?"

The answer is, 'It depends'. It depends on the type of prototype document you have and what elections you make in the adoption agreement.

First, it is correct that who receives an allocation of the discretionary profit sharing contribution cannot be based on if the participant makes salary defereral contribution or not. Under IRS regulations, any contribution that is based on the participant making salary deferral contributions is considered a matching contribution.

Second, if you are using a 'Standardized Prototype' document for your plan, then there are restrictions included in the basic plan language that determine who receives a profit sharing contribution. Under a standardized plan, any employee who has met the eligibility requirements and is employed on the last day of the plan year is eligible to receive a profit sharing contribution (even if they do not make salary deferrals) AND any participant who terminates at any time during the plan year with over 500 hours of service (including vacation time and sick time) is also elgible to receive a profit sharing contribution. You do not have an option to change these requirements.

Under a plan document other than a standardized prototype, the plan sponsor has more options. You can have different eligibility requirements for when an employee qualifies to make salary deferral contributions and is eligible to receive a profit sharing contribution. This way an employee can make salary deferral contributions sooner than they are eligible to receive a profit sharing contribution.

Also, the plan can be written to require an employee who has met the eligibility requirements for a profit sharing contribution, to satisfy additional service requirements (for example, be employed on the last day of the plan year and/or work 1,000 or more hours of service during the year) each year to actually receive a profit sharing contribution.

As you can see, it depends on how your plan document is written.

[Mike Preston]

As I understand the question, the plan provides for employee deferrals and discretionary employer contributions. It is possible to have different eligibility requirements for each, provided they meet the minimum requirements set forth by the law and regulations.

Yes, that is correct. I just want to make sure that my 401k administrator is advising me correctly. They are stating that the discretionary profit sharing must be given to all eligible particpants, wheter they are deferring contributions or not, according to IRS regualtion and not my adoption agreement elections. So, they are stating that if an eligible participant declines to participate in deferring money for retirement, they will still need to enroll in the plan to receive the discretionary profit sharing. Does this sound correct?

It looks like you are getting more than an ear full on this so I'll try to be brief. I just want to deal with a couple of your phrases, in case it helps clarify things a bit.

First, you say that something must be done "according to IRS regulation and NOT MY ADOPTION AGREEMENT ELECTIONS" (emphasis mine). If I was asked whether that statement was correct or not, without any further explanation, I would say that it is a false statement. The reason is that you must satisfy both. If you don't, then it is a BAD THING. You absolutely must insist that the contributions you make satisfy IRS regulations and are not in conflict with your adoption agreement elections.

Second, you say that if an employee is not contributing their own money to the 401(k) plan, then "they will still need to enroll in the plan to receive the discretionary profit sharing." The language that you used makes it seem like you think the employee has to do something, like fill out a form, or agree to open an account to receive a profit sharing contribution. That is definitely an incorrect view of things. It is better said that the plan administrator (that would be you) must establish an account on behalf of those who are eligible to receive a contribution. You enroll them. They don't need to do anything. You do it for them. If your 401(k) administrator is saying that the employee has to "enroll" by filling out some sort of form before they can get a profit sharing contribution, they are wrong. My guess is that you meant to say that "they must have an account established for them even though they did not contribute to the 401(k) portion of the plan". If you did intend to say that, then all is right with the world.

Good luck.