May a Plan be amended to require 401(k) contributions as a condition o

[Hoard1]

May a Plan be amended to require Mandatory 401(k) contributions as a condition of employment? Has anyone had experience with doing this?

[Guest PLHart]

If a plan required mandatory employee contributions, I can'y see how it could really be considered a "cash or deferred arrangement" under IRC 401(k).

I assume you are asking question due to ADP/ACP test problems. How about adding a QNEC? Although this is an employer contribution, however, it might be offset by offering lower pay increases in subsequent year. Might not be appreciated by employees but a possible solution anyway.

[Earl]

fails by definition of deferral. made pursuant to an employee election not to receive

[david rigby]

Are you asking about "negative elections"?

[This message has been edited by pax (edited 12-01-1999).]

[davef]

The prototype document adds back in COE contributions to compensation for purposes of calculating contributions.

We do not treat COE contributions as FICA wages.

Although I'm not 100% sure, but I suspect that the employers are counting the COE contributions as part of compensation for overtime and other benefit purposes.

[davef]

We have an approved prototype plan that allows for condition of employment (COE) contributions under a 401(k) plan. These contributions are not treated as elective deferrals, but rather as QNECs. By characterizing them as QNECs, you run into some interesting issues. For example:

1. They are not subject to the 402(g) limits. But they are counted as deferrals for ADP purposes. Amounts deferred above the COE amount would be treated as elective deferrals.

2. They are counted as annual additions, but not added back in to 415 compensation (as would be the case with true elective deferrals).

3. They need to pass 401(a)(4) if they are not uniform (we have some plans that increase the COE contribution as service increases)

[Dowist]

You also have interesting FICA issues, issues relating to the definition of compensation for other benefits (for example, group term life insurance), and wage and hour issues (how do you calculate overtime)?

On the FICA, I don't think the mandatory contributions would be counted - which is an issue for many ees.

On the other - I think an employee would be concerned if his overtime was based on a definition that didn't include mandatory contributions, or if his other benefits were reduced by the mandatory contributions.

[Hoard1]

davef On your prototype are these COE contributions employee deferrals or is the employer reducing compensation and than making a contribution in the same amount as a QNEC? I'd like to talk with you further about your prototype with an eye toward purchasing a document. Please contact me at

jay.scholz@padgett-cpa.com or on the board.

Thanks

[GBurns]

The original post spoke of requiring mandatory contributions as a condition of employment. subsequent posts talk about condition of employment contributions. these dont seem to be the same thing. Is this what you meant..Hoard1??

[Hoard1]

I'm looking for a way to require employees to make contributions a 401(k) Plan. Either mandatory or condition of employment although that seems to mean the same thing.

[GBurns]

davef... can you please explain COE.

Hoard1...You cant condition any aspect of plan participation on any condition of employment and vice versa. It would be a violation of IRC 408 and ERISA 510. A case to review that cited many other cases would be ..Garatt, Lisbeth v. John S. Walker, 121 F.3d 565 (10th Circuit 1997), US Court of Appeals 10th Circuit, docket No. 96-1470, Tax Analyst citation 1998TNT240-11.

[John A]

Is there an exception for government plans?

At least for some state defined benefit plans, I believe that an employee is required to participate in the plan as a condition of employment; since the plans are mandatory contribution defined benefit plans, the employee essentially is required to agree to contribute x% of his/her salary to the plan in order to be hired.

[davef]

Hoard, the condition of employment contributions are made as QNECs, not elective deferrals. The employer basically says up front to a prospective employee that, as a requirement for being employed, they must contribute a minimum percentage of pay to the 401(k) plan (or money purchase plan, on an after tax-basis).

[davef]

GBurns, I read the case you cited, and I don't really think it affects how the COE contributions operate under the plans I work with.

1. The plans I deal with impose the COE requirement BEFORE the person is hired -- so the employee clearly knows what he/she is getting in to, and can decline employment if the COE contribution does not suit them. In the Garrett case, the employer tried to reduce the employee's salary to offset the contribution several years after she was hired and basically said "take it or find another job."

2. In the Garrett case, the appellate court specifically said that there was NO ERISA 510 violation. This was primarily because the employer's SEP contribution was discretionary. (One can infer that if the contribution was not discretionary, there might have been an ERISA 510 violation, but that was not specifically addressed by the court.)

3. As John A. pointed out, many government employers require employees to contribute as a condition of employment. Also, COE contributions can be found in 403(B) TSA programs (as is evidenced in the IRS' Examiniation Guidelines). Finally, the prototype plan I work with has been approved twice by the IRS, with the COE contribution feature being fully disclosed. So, I've got a fairly high level of comfort that it is permissible.

[IRC401]

The only aspect of your prototype that I don't understand is how you can add the 3% reduction back in for purposes of calculating other contributions and benefits.

For example, suppose that a new hire has a nominal salary of $1000 per week. The company actually pays him $970 (before withholding) and contributes $30 as a QNEC. For purposes of section 415 (and 404) his compensation is $970. It seems to me that if you want to have a safe harbor definition of compensation, you have to base his 401(k) election, match, DB benefits, etc on $970 of compensation. The company can write a plan that bases benefits on a "benefits compensation" of $1000, but wouldn't the company need to do a 414(s) analysis, and aren't prototypes supposed to use a safe harbor definition of compensation?