Back Pay

[401 Chaos]

I have found a few prior discussions regarding how to handle back pay awards in 401(k) plans but none that are particularly current or seem to address all the potential issues. We have a former employee who is about to receive a settlement that will be treated as W-2 wages. The amounts will be paid tomorrow but relate to wages she would have received from both 2009 and 2010. We have a safe harbor 401(k) that provides a 3% nonelective contribution.

Questions:

1. I assume the back pay should be counted as compensation for plan purposes and the hours represented by the back pay recognized as hours of service?

2. Assuming the answers to 1 are yes, do we have to recalculate the amounts attributable to 2009 in the 2009 safe harbor contribution or can we simply factor everything into 2010--the year the amounts were paid.

3. What do we do about elective deferrals that would have been possible over this period? If former employee was participating in 401(k) when she left, do we assume that deferral would have continued and deduct these amounts from the settlement award?

[DMcGovern]

I don't know what the prior discussions said, but 1.415-6 has the following:

"ii) If, in a particular limitation year, an employer contributes an amount to a participant's account because of an erroneous forfeiture in a prior limitation year, or because of an erroneous failure to allocate amounts in a prior limitation year, the contribution will not be considered an annual addition with respect to the participant for that particular limitation year, but will be considered an annual addition for the limitation year to which it relates."

That would mean that the amounts are not annual additions for the year contributed, but I don't know if there is any related sections in the code for your question in #2.

Seems like #3 would be treated as a missed deferral opportunity (and corresponding match, if applicable), with the corrections outlined in the EPCRS

[401 Chaos]

Thanks very much. That seems consistent with Treas. Reg. § 1.415©-2(g)(8) which provides that "Payments awarded by an administrative agency or court or pursuant to a bona fide agreement by an employer to compensate an employee for lost wages are compensation within the meaning of section 415©(3) for the limitation year to which the back pay relates, but only to the extent such payments represent wages and compensation that would be included in compensation under this section."

So, sounds like we are talking about adjustments to both the safe harbor nonelective contribution plus possible elective deferral corrections for two separate years? Yuck!

[Guest Sieve]

401 --

As to h/s, DOL regs specifically include back pay awards in h/s (DOL Reg. Section 2530.200b-2(a)(3)). But check your Plan document, because the regs do not require that more than 501 h/s be credited for any period if the back pay would have been for a period of time when the individual would have been entitled to payment while performing no duties (such as being out on paid sick leave).

Also, if the agreement did not discuss pension/401(k) issues, then the agreement ought to be reformed to address whether, as you suggest, any retroactive deferrals should reduce the gross settlement amount.

[401 Chaos]

Sieve, thanks very much. The plan does include a provison capping hours of service at 501 in cases where amounts are credited but work is not actually being performed, however, it appears to apply only to vactation, holidays, sickness, disability, lay-off or leave of absence. The back pay provision appear to be in a separate category not capped by 501 hours. Not sure if that is typical or required but based on my reading it seems like we will need to credit full number of hours for each hour covered by the back pay awards.

[Guest Sieve]

I agree. The h/s limit applies not to the back pay award itself, but it applies to periods of time covered by the back pay award when the individual would not have been performing services had he/she been on the payroll at that time.