Discretionary Contributions

[Guest ccl]

I have a question concerning a 401(k) plan which has a discretionary contribution option. The plan has a one-year eligibility period before an employee is entitled to a discretionary contributin BUT once the employee is eligible, the company makes a discretionary contribution based on the employee's first year and second year compensation, all in one.

Ex. An employee is hired in October of 2008. The employee becomes eligible to participate in the plan on Nov. 1, 2009. In February 2010 the employer makes a discretionary contribution for the 2009 plan year. For the new employee, the employer makes a contribution based on the employee's 3 months worked in 2008 in addition to the employee's compensation earned for the plan year 2009. Thus the discretionary contribution is based on 15 months of salary (3 from 2008 and 12 from 2009).

Is the employer allowed to do this?

Thanks!

[Jim Chad]

I think this could be done with a flexible document. (I'm thinking of each person in their own group).

But it would have to pass the math tests showing the plan is not more discriminatory than is legally allowed. Also, for the testing, compensation would have to be based on the one most recent year.

[Bird]

They are allowed to do that in the same sense that they are allowed to pick a number out of thin air; as Jim notes, it's probably best done by creating a separate group for each person, although I suppose you could write your desired formula into a document. It might be a little more challenging than you think to get the language just right.

But it's subject to non-discrimination and testing on the current year's compensation. Personally, I don't think it's worth the hassle and expense.