Qualified CODA...

[Guest EPS2]

I have a client that has an employee that is paid a salary once a month before service is credited:

For an example: The participant gets paid on October 30th for service credited in November.

Is this a qualified CODA? Oh...and the participant happens to be the owner's wife.

All other employees are paid twice a month AFTER their service is credited.

[WDIK]

A Cash or Deferred Arrangement exists if an employee can elect to receive a cash payment or have it contributed on his or her behalf to some type of tax-deferred arrangement like a 401(k) plan.

Based on the information provided, I do not see the scenario you describe as CODA.

[Guest Sieve]

I think you are asking whether a 401(k) plan's elective deferral by wife can allow deferrals from pay if the pay is prior to the performance of services? Is that a correct restatement of your question?

As I understand it, the answer to the question--looking only at the regs. under IRC Section 401(k)-- ought to be "yes" (how about that for an unequivocable assertion!!). See Treas. Reg. Section 1.401(k)-1(a)(3)(iii)©(1):

"Contributions are made pursuant to a cash or deferred election only if the contributions are made [to the Plan] after the employee's performance of service with respect to which the contributions are made (or when the cash . . . would be currently available, if earlier)."

Moreover, "[c]ash . . . is currently available to the employee if it has been paid to the employee or if the employee is able currently to receive the cash . . . at the employee's discretion [regardless of] whether it has been constructively received . . ." (Treas. Reg. Section 1.4019k)-1(a)(3)(iv).) There is a provision of the regs. which seems to prevent payment "made before services with respect to that pay period are performed" unless due to "bona fide aministrative considerations" (Treas. Reg. Section 1.401(k)-1(a)(3)(iii)©(2)), but that exception really applies to payment before the times provided in the -1(a)(3)(iii)©(1) provisions, i.e., before serevices are performed or, if earlier, before current availability.

It seems then, in your described scenario, that the cash is "currently available" on the once-a-month payday (even though prior to the performance of the services), assuming that nothing is expected to be repaid if termination of employment were to occur prior to the completion of the services with respect to to which the pay relates. The requirement of the reg. is met, since there is no requirement in the reg. that a cash or defered election can apply to compensation received only after the services have been performed.

That being said, however, I only wonder if there is a discrimination issue with respect to the effective availability of this benefit (under Treas. Reg. Section 1.401(a)(4)-4©(1)). Whether or not there is a current availability problem under Treas. Reg. Section 1.401(a(4)-4(b), I believe there is an effective availability issue (see, e.g., Ex. 3 of Reg. -4©(2)). I think the only consequence of this disparate treatment, however, is an earlier contribution for wife (an HCE)--which, under today's market conditions, may or may not be an advantage--but the consequences of the disparate treatment are not an issue, just the fact of the disparate treatment. So, I think the plan's deferral provisions violate IRC Section 401(a)(4) due to the payroll practice of pre-paying wife, especially since there appears to be no business reason for treating wife's pay differently than anyone else's pay.

At least that's how I would analyze it.

[WDIK]

I think you are asking whether a 401(k) plan's elective deferral by wife can allow deferrals from pay if the pay is prior to the performance of services?

I think you probably did a great job of reading between the lines.

[GBurns]

The OP said "before service is credited", the restatement to "prior to the performance of services" might be incorrect. Personally, I have no idea what the posted means by "credited" in this context.

[mphs77]

What is the business entity type? Perhaps these are guaranteed payments of some sort?

Inquiring minds want to know.

[Mike Preston]

There can not be discrimination in the situation described. Once the money is paid, it is deferable. The decision to pay is not subject to a4.

[Guest Sieve]

Mike, I agree that there's no plan provision which produced any potential disparate treatment, and there really is nothing more here than a payroll practice which is not tested under 401(a)(4) standards.

It seems to me, though, that without a business reason for treating one HCE differently, this may quack like a duck. Perhaps, though, it's a p'ship, so that owner isn't paid regularly, and perhaps the NHCEs are leased so that their payroll is based on the PEO's payroll practices, and that would give a business reason for the difference in pay processes between NHCEs and wife. We need a lot more facts, I think, to see whether or not my earlier response is nothing other than jousting at windmills (a favorite practice of mine) . . .