Employee would like no 401(k) taken from overtime check only

[betheeg]

Definition of comp includes overtime. Overtime is paid in a seperate check to employee. Employee would like 401(k) deferrals taken form regular paycheck only. Can this be done by having employee sign salary reduction agreement stating no 401(k) from overtime checks?

Thanks in advance.

[david rigby]

Can this be done by having employee sign salary reduction agreement stating no 401(k) from overtime checks?

Not unless the plan permits such election.

[JanetM]

As David said, only if the plan permits. If this is plan that allows deferral changes at anytime, then yes you can change for every check.

If the plan limits that numbers of changes, then you have to follow the plan.

Is there a TPA/recordkeeper who would be doing this - or is it a small plan with employer or HR/payroll department communicating with employees?

[jpod]

If the plan document does not address the issue (and I'm sure it does not), then the employer should refuse the request and move on, rather than making an interpretation that accomodates the employee's goofy request.

[Bird]

I don't see this as such an unusual or onerous request, and I'm not so sure why there seems to be an implication that a document wouldn't permit it. I'd guess it is pretty standard; here is text from one of our plans:

Deferral Percentage: For each contribution period, a Participant may elect that up to 100% of his or her Compensation received during the contribution period be withheld as an Elective Deferral. Elective Deferrals may be made in whole percentages of Compensation or in specific dollar amounts as designated by the Participant. The Administrator will have the right to direct that such percentages of Compensation be rounded to the next highest or lowest dollar. Furthermore, on a uniform nondiscriminatory basis, the Administrator may permit a Participant to identify separate components of the Participant's Compensation (such as base salary, bonuses, etc.) and to specify that a different percentage (or dollar amount) apply to each such component.

If I'm getting a regular paycheck, and want to reach a certain amount, like, say, $15,500 in a year, I might have a fixed amount taken out each pay so that I get to that total over the course of the year. And if I got a separate check for overtime, well, why should I be forced to have money taken out of that (or be forced to make a new election every time a check is cut)?

[jpod]

Bird: The answer to your Q is "because it's a pain." Bad plan design. Allowing people to differentiate between regular pay and bonuses is sensible and reasonable, but not between normal pay and overtime pay.

[Steelerfan]

The plan document does address the issue--the plan's definition of compensation includes overtime, therefore it would be a plan operational failure not to take salary deferrals from it. You'd have to amend the plan document definition of compensation to exclude overtime and the employer might not want to do that. Giving employees the choice of which components of comp to defer out of sounds like a great idea that is a compliance disaster in the waiting.

[JanetM]

Betheeq, if you do decide to allow this person to not defer on separate OT check, I would definately make them sign a 0% elections for every check you do this on.

[betheeg]

Thanks so much everyone for your responses.

JanetM-this is a small plan with an HR dept communicating with the employees. It would not be a huge deal to not withhold from the overtime check. However, the plan only allows changes to an election Jan 1 and July 1. So, I do believe it is an operational failure to allow them to not defer on the overtime check, even with a signed election for every check. Do you agree?

[masteff]

However, the plan only allows changes to an election Jan 1 and July 1.

Unless your plan language that defines deferral elections has nice wording like Bird's does above that permits you to split out overtime from regular pay.... your statement quoted here gives us the answer.

And if your plan did allow for a multi-part election (like Bird's does above), then I think you'd have to alter your election form and make the choice available to every single employee, every Jan 1 and July 1 (and it would therefore apply to every regular and overtime check during each 1/2 year). Since we're past Jan 1, obviously the earliest this could be done is July 1. Given that you have 5 months until the earliest this could be done, you do have time to put in an amendment to make it work.

[Steelerfan]

How is he going to get past the plan's definition of compensation including overtime pay?

[Bird]

Bird: The answer to your Q is "because it's a pain."

Not to me, if I'm the TPA. To the payroll department or p/r company maybe. Why do I care?

How is he going to get past the plan's definition of compensation including overtime pay?

If he is allowed to, and does, specify exactly which parts of comp he wants money withheld from, then I don't think the definition of comp matters.

As far as the form goes, I think a regular form would be fine, with a written addition "don't withhold from overtime pay." Someone who doesn't add that note gets money withheld on all pay. Someone who does, gets it done that way forever or until he changes it.

[JanetM]

Betheeq,

Based on fact pattern you gave, absolutely you would have op failure. The person is stuck with having deferrals taken form OT check until July 1. Now you could suggest the plan amendment to change that, as others have pointed out you would have to change a couple of things to make it work.

IMHO it isn't worth it to amend the plan to make one person happy. What you could do, since you say that it isn't a problem to make changes, is allow more frequent deferral changes. For example they can make 1 deferral change per month. That would allow this person some freedom while not increasing complexity in operation.

[betheeg]

But based on some of the opinions above, even IF an amendment was made to allow changes more frequently, there would still be a problem with the definition of comp. If the definition includes overtime, is there even the option of having her sign an election form stating no reduction on the overtime check? Or would the definition of comp need to be amended also to exclude overtime (which I wouldn't recommend)?

I think my recommendation is just going to be to deny the request.

Thanks again for the help.

[JanetM]

Definition of comp can stay the way it is. This person elects 0% deferral and it would apply to all payments made for the period of time it is in effect. Then they elect 10% and it applies to all comp for the period until changed by new election.

[masteff]

I agree w/ Janet. Go back up to Bird's post that has the quote from his plan's text. The section he's quoting is the definition of the deferral percentage. It explicitly states that the deferral election can "slice and dice" the components of comp for the purposes of the election. So def of comp stays the same, only the def of deferral election would need to be reviewed/changed.

[Steelerfan]

I agree w/ Janet. Go back up to Bird's post that has the quote from his plan's text. The section he's quoting is the definition of the deferral percentage. It explicitly states that the deferral election can "slice and dice" the components of comp for the purposes of the election. So def of comp stays the same, only the def of deferral election would need to be reviewed/changed.

We seem to be going in circles with this. What are the chances that the plan provides for slice and dice percentages at this time (let alone for overtime pay), without which, it would appear you are locked in until you are permitted by the plan to change your election, which at this time would appear to affect all plan compensation, not just overtime pay.

[masteff]

We seem to be going in circles with this. What are the chances that the plan provides for slice and dice percentages at this time (let alone for overtime pay), without which, it would appear you are locked in until you are permitted by the plan to change your election, which at this time would appear to affect all plan compensation, not just overtime pay.

In the OP's latest post, the follow-up question was to the effect of "wouldn't we have to amend the def of comp?"... to which the answer is "no, the amendment would be to the def of deferral election". Just because the plan doesn't allow slicing and dicing now doesn't mean it couldn't... assuming the company really cared enough to go to the effort and cost to amend the plan.