bonus contribution for long-term participants

[Santo Gold]

403(b) plan with a profit sharing component. There are 2 HCEs with around 120 NHCEs in the plan.

The ER wants to add a provision in the document that in the 13th year of participation, a special $5,000 profit sharing contribution will be made to those individuals in their 13th year. I'm not sure if this is in addition to the regular PS contribution or, for those 13 year participants, this takes the place of their PS contribution for that year.

(1) Can something like this be written into a prototype-style document?

(2) Is this a valid contribution formula

(3) What if in year 13 both HCEs are eligible and maybe only 5 NHCEs are eligible. Would that still fly?

Thanks for any comments.

[mbozek]

403(b) plan with a profit sharing component. There are 2 HCEs with around 120 NHCEs in the plan.

The ER wants to add a provision in the document that in the 13th year of participation, a special $5,000 profit sharing contribution will be made to those individuals in their 13th year. I'm not sure if this is in addition to the regular PS contribution or, for those 13 year participants, this takes the place of their PS contribution for that year.

(1) Can something like this be written into a prototype-style document?

(2) Is this a valid contribution formula

(3) What if in year 13 both HCEs are eligible and maybe only 5 NHCEs are eligible. Would that still fly?

Thanks for any comments.

Answers:

1 Its permissible if the adoption agreement for the plan permits adoption of a discretionary formula.

2. Its valid as long it is not discriminatory in favor of HCEs under the rules of 401(a)(4). Always permissible as long as only NHCEs receive the additonal contribution.

3. see #2. If answer is no then employer can pay $5,000 bonus as W-2 income which employees can contribute as elective contribution to 403b plan or to a 457b plan.

[Santo Gold]

403(b) plan with a profit sharing component. There are 2 HCEs with around 120 NHCEs in the plan.

The ER wants to add a provision in the document that in the 13th year of participation, a special $5,000 profit sharing contribution will be made to those individuals in their 13th year. I'm not sure if this is in addition to the regular PS contribution or, for those 13 year participants, this takes the place of their PS contribution for that year.

(1) Can something like this be written into a prototype-style document?

(2) Is this a valid contribution formula

(3) What if in year 13 both HCEs are eligible and maybe only 5 NHCEs are eligible. Would that still fly?

Thanks for any comments.

Answers:

1 Its permissible if the adoption agreement for the plan permits adoption of a discretionary formula.

2. Its valid as long it is not discriminatory in favor of HCEs under the rules of 401(a)(4). Always permissible as long as only NHCEs receive the additonal contribution.

3. see #2. If answer is no then employer can pay $5,000 bonus as W-2 income which employees can contribute as elective contribution to 403b plan or to a 457b plan.

But there would be a problem if we did write the formula into the document and in a year in which an HCE were to receive this contribution, the plan would fail 401(a)($). Sure, the HCE could bonus the amount in via payroll reduction as you suggest, but the document still calls for this individual to receive a $5,000 ER contribution. I don't think we could simply not give the HCE the $5,000 while giving the $5,000 to however many NHCEs are eligible. That would violate the plan document, wouldn't it?

[mbozek]

403(b) plan with a profit sharing component. There are 2 HCEs with around 120 NHCEs in the plan.

The ER wants to add a provision in the document that in the 13th year of participation, a special $5,000 profit sharing contribution will be made to those individuals in their 13th year. I'm not sure if this is in addition to the regular PS contribution or, for those 13 year participants, this takes the place of their PS contribution for that year.

(1) Can something like this be written into a prototype-style document?

(2) Is this a valid contribution formula

(3) What if in year 13 both HCEs are eligible and maybe only 5 NHCEs are eligible. Would that still fly?

Thanks for any comments.

Answers:

1 Its permissible if the adoption agreement for the plan permits adoption of a discretionary formula.

2. Its valid as long it is not discriminatory in favor of HCEs under the rules of 401(a)(4). Always permissible as long as only NHCEs receive the additonal contribution.

3. see #2. If answer is no then employer can pay $5,000 bonus as W-2 income which employees can contribute as elective contribution to 403b plan or to a 457b plan.

But there would be a problem if we did write the formula into the document and in a year in which an HCE were to receive this contribution, the plan would fail 401(a)($). Sure, the HCE could bonus the amount in via payroll reduction as you suggest, but the document still calls for this individual to receive a $5,000 ER contribution. I don't think we could simply not give the HCE the $5,000 while giving the $5,000 to however many NHCEs are eligible. That would violate the plan document, wouldn't it?

I dont understand why the plan sponsor cannot limit the contribution in years when there would not be discrimination. E.g Adopt plan amendment as follows: "The $5000 contribution will be contributed to the account of an HCE in each plan year except to the extent such a payment would violate non discrimination provisions of the IRC applicable to the plan." The sponsor would make the payment as compensation outside of the plan.