Mandatory Employee Contributions under section 401(m)

[buckaroo]

I am working with my colleagues on a take over 401(k) PS plan that has language regarding a mandatory 2% contribution as defined by 401(m). (I did not know this was allowable in a DC plan. If someone could point me in the right direction to read more about this I would greatly appreciate it.) Based on what they have told us:

1) They first said is a pre-tax contribution. However, I do not see how this is possible based on the referenece to 401(m). I would think that it has to be an after-tax contirbution. Can this be confirmed?

2) They then said that it is a non-elective contribution. I assume that they meant that the participant could not waive out and it was required. I do not think they meant a non-elective (PS) contribution as I would think of it. Does anyone see how this type of contribution could be the "standard" non-elective contribution (including the idea that it is under 401(m))?

Any replies are greatly appreciated. I have some other issues which I may address based on the answers to the above.

Thanks in advance.

[Tom Poje]

this might (I stress might) possible be addressed in 1.401(k)-1(a)(3)(v) which is the section on one-time elections

[buckaroo]

Tom,

Thanks for the post. I had actually looked at this and dismissed it. However, your answers in the past have been spot on so I have taken your "might" and looked at this section again. The issue I keep getting hung up on is the fact that the section refers to it as an election. From my discussions with my colleagues, I do not believe that they were given a choice to elect. I believe that the contribution is mandatory. There is no choice.

Thanks again for taking the time. If you have any other thoughts, I welcome them.

[Tom Poje]

well, the only other place would be 1.401(m)-1(a)(3) which deals with employee contributions. there is no distinction made between 'madatory' or other after-tax contributions, so I would assume as long as these contributions are indeed after-tax they fall into that category.

[Guest Sieve]

This sounds like an old-fashioned "thrift plan" where the employer would make matches on mandatory after-tax employee contributions. The reference to 401(m) may simply mean that the after-tax employee contributions must pass ACP.

Or, in current-day terms, this may be a negative election (automatic contribution or auto enrollment) after-tax plan, which is permitted (and which now preempts state payroll laws pursuant to DOL Reg. Section 2550.404c-5(f)).

Is that anywhere near helpful or on track?

[david rigby]

I know the original post said 401(k), but just to cover the obvious: could this plan be a 403(b) and/or governmental?

[buckaroo]

All:

Thanks for your replies.

David,

Unfortunately, yes, it is a 401(k).

Tom,

I was emersed in 1.401(m)-1(a)(3) and came to the same conclusion. Thanks for verifying.

Sieve,

Yes, I believe that is what some of my colleagues thought. They said they thought it might be a carry over from an old plan. I am glad that you think so as well. It certainly feels that we are on the right track. I thought of a negative election, but it does not seem to allow the participant to waive out. That seems to be the start of where I was lost.

My lack of knowledge stems from never seeing a mandatory AT cont in a plan before. (I have been doing this quite a while and this is a new one on me.) I didn't know that this could be done. And trying to find out information on it seems difficlut. I found the ssame cite that Tom detailed as well, but it did not detail the mandatory issue. I was hoping to read how this worked, but there does not seem to be much reference to this. I assume it is rare now. Is that your take on this type of set-up?

[K2retire]

Does the document truly require the contributions -- or is the employer just telling people they have to do it?

[buckaroo]

From what I was told from my colleagues, it seems to indicate mandatory. I am working with all parties involved to clarify.

[Guest Sieve]

There certainly is authority for mandatory after-tax employee contributions in a qualified plan. Look at IRC Section 411(a)(3)(D) & ERISA Section 203(a)(3)(D). The practice long pre-dates ERISA, and, if memory serves (which it doesn't always!), such provisions generally were found in DB plans.

There were, of course, no pre-tax e'ee deferrals permitted until the late '70s/early '80s, and mandatory after-tax contributions were a way for the employer to make certain that an employee chipped in for retirement in an era where virtually 100% of all retirement plans were supported only with employer contributions.

[J Simmons]

There certainly is authority for mandatory after-tax employee contributions in a qualified plan. Look at IRC Section 411(a)(3)(D) & ERISA Section 203(a)(3)(D). The practice long pre-dates ERISA, and, if memory serves (which it doesn't always!), such provisions generally were found in DB plans.

There were, of course, no pre-tax e'ee deferrals permitted until the late '70s/early '80s, and mandatory after-tax contributions were a way for the employer to make certain that an employee chipped in for retirement in an era where virtually 100% of all retirement plans were supported only with employer contributions.

It is quite often the case that when an employee dating back to that era retires and the DB plan has long since stopped such mandatory contributions, the records are scant and the current benefits personnel unaware of how much and how to handle those benefits.