Funding PS contribution

[bzorc]

A 401(k) requires the owners of the company (S corporation) to fund their own employer discretionary contribution, based on a cross-tested allocation. One of the owners terminates employment June 1, 2011, and to date has not funded his/her contribution. They want to know if they can revoke their 2010 election, based on the fact that they will not be paid any future compensation with which to fund the contribution. Or do they have to come up with the funding based on the 2010 election? Thanks for any replies.

[12AX7]

Your situation is a little hard for me to pick apart, but just to perhaps simplify this, does the plan allow for each eligible participant to be in their own allocation group? I could ask a lot more questions, but let's start with this one.

[Bird]

It's writing like this that gets us all in trouble.

The "401(k)" most certainly does not require the owners to fund their own employer discretionary contributions. And the company decides how much each group gets under the group allocations. I don't know if the "they" you are referring to is the collective owners or the singular "him or her" owner who left. But I'd say if the memorandum to the trustees has not been signed yet, and the money hasn't been paid, that the contribution hasn't really been determined.

If you're saying that each owner signs an individual election on how much his or her employer contribution is to be, then I'd say that you have a different set of problems.

[QNPG]

A 401(k) requires the owners of the company (S corporation) to fund their own employer discretionary contribution, based on a cross-tested allocation. One of the owners terminates employment June 1, 2011, and to date has not funded his/her contribution. They want to know if they can revoke their 2010 election, based on the fact that they will not be paid any future compensation with which to fund the contribution. Or do they have to come up with the funding based on the 2010 election? Thanks for any replies.

Would the IRS - if ever presented the opportunity - view this arrangement as a CODA?

[QDROphile]

I second Bird's comments. It sounds like contributions an alloocations have been set. They are not set by individual elecltion, and they canot be undone by particpant election. If one is cynical enough (and these plan designs are cynical if one can describe them in terms of individual elections), one can say that the process by which the employer sets the contribution and allocation takes into account the total compensation of each participant and sets the mix. An employee does not fund the contribution. The contribution for the employee may have the effect of reducing the employee's current compensation in the mix of current/deferred compensation in package for the year. Once contributions are set and then earned under the eligibility and particpation terms (e.g. 1000 hours of service) the employer is bound to make the specified contribution. It is an employer obligation to make the contribution.

I hope that this sort of conversation gets employers in trouble if they engage in this sort of abuse. But, the IRS seems to have abandoned any pretense of stemming the abuse.

[12AX7]

QNPG - I would say yes (possibly) to the extent that an individual partner (in a partnership) would decide on the amount to be allocated to their nonelective account. This issue is much broader than the answer I am giving you, and has been discussed here before.

[Bird]

QNPG - I would say yes (possibly) to the extent that an individual partner (in a partnership) would decide on the amount to be allocated to their nonelective account.

Yes, that's a CODA. To not be a CODA, it should be a partnerSHIP decision.