Minimum Deferral %

[30Rock]

Is there a problem with a plan setting a minimum deferral % of lets say 3%?

I recall an issue with maybe effective opportunity for the NHCE's, but maybe there is a range that is considered reasonable?

Have others encountered this issue?

[Mike Preston]

I don't see any justification for a minimum and would be concerned that a minimum would play fast and loose with effective availability.

[30Rock]

Thanks so much!

[Bill Presson]

I don't see any justification for a minimum and would be concerned that a minimum would play fast and loose with effective availability.

I've seen lots of plans that have 1% as a minimum. Any issue with that?

What about limiting the elections to only whole percentages?

Just trying to see where you draw the line, Mr. Preston.

[Mike Preston]

I don't object to either. But 3% as a floor is a bit much, IMNSHO.

[rcline46]

EACAs and QACAs require a 3% minimum. As such I don't have a problem with 3% although I would not suggest it outside of these plans.

[jpod]

Just curious, but what is the theory behind a 3% minimum? Is it that all those NHCEs who do contribute, but contribute at less than 3%, will do 3% if their only choices are 3% or 0%, thereby enhancing their ADP? If so, that's interesting, but I'd like to see the studies that back that up.

[BG5150]

EACAs and QACAs require a 3% minimum. As such I don't have a problem with 3% although I would not suggest it outside of these plans.

But those are only the initial %'s. Participants can lessen the deferral if they wants, can't they? In the OP's situation, it would be only 3 or higher.

[rcline46]

Youngsters you are. In mandatory contribution plans, the IRS opined that a mandatory 6% was ok, but not higher. So 3% should be fine. Yes in an EACA the employee can elect a lower percent (if the plan does not have minimum) but the IRS again feels that 3% is ok, and accelerators can go to 10% without participant consent. (must go to at least 6% - there it is again).

Sales and getting people to start deferrals and then pushing them up is a whole different matter.

[30Rock]

Recline - that is a fantastic comment and point you make. Where did the IRS state that a 6% mandatory amount is alright, in a PLR or Q&A?

Thanks!

[rcline46]

It was a LONG time ago, likely I ran across it in the late 70s. Research would have to be under mandatory contributions.

[jpod]

I too remember that guidance vis a vis mandatory contributions under "thrift" plans. Perhaps it's good authority, but maybe not given that the effective availability doctrine now has some real regulatory teeth, as opposed to one individual within the IRS's employee plans office calling the shots as he saw fit 35+ years ago. In any event, I still am not convinced it's a good idea.

[30Rock]

I agree. Plus I think we are off point a little. My actual question is not a mandatory contribution question. It is simply can a plan set a minimum of 3% in order to get into the plan. If you do not elect to contribute 3% you are not allowed to participate and you cannot elect a lower %. This could have a discriminatory impact on the NHCEs who may only be able to contribute 1 or 2% therefore failing effective availability.

Also the true "mandatory contributions" are not a CODA, they are nonelective contributions that do not count towards the 402g limits. Therefore, effective availability is not an issue.

I think I answered my own question! Thanks for making me think!

[masteff]

The IRS has NO problem w/ a 3% minimum. We had this at my previous employer in our salaried plan and it's passed IRS and DOL audits several times during its existence (plan had 2000+ participants so it wasn't just a small fluke plan that slipped by).

[jpod]

masteff: Very useful information. Still, I am interested to know what is the rational, and how does that affect ADP testing (positively or negatively)?

[masteff]

masteff: Very useful information. Still, I am interested to know what is the rational, and how does that affect ADP testing (positively or negatively)?

I wasn't around when it was established in the 80's so I can't truly speak to why not to allow 1% or 2%, but 3% is the amount for full matching (in that particular plan).

As for impact on testing, I guess I should disclose that we had a QNEC of 1% for all participants and I seem to recall that it saved us a time or three. (Due to a raid on the pension, the 401(k) was very generous as there wasn't a salaried pension plan for a number of years and the rich 401(k) offset that loss.)

[GMK]

If you do not elect to contribute 3% you are not allowed to participate and you cannot elect a lower %.

Just to be a little careful with words, unless you elect to waive participation, you become a participant (are allowed to participate) when you meet the eligibility requirements, which usually do not depend on whether or how much you contribute ... which appears to be what you meant.