Plan-Imposed Limit on 401(k)

[Doghouse]

Assuming the plan language is not an obstacle, is it feasible for the plan to impose a deferral limit which says something like "for HCE's under 50, the limit is 0%"? Is that an age discrimination concern?

Dog

[ETA Consulting LLC]

What you are effectively saying is that HCEs are not eligible to defer until they reach age 50. Why not just come up with a class exclusion identifying the specific HCEs and make them ineligible for the plan (i.e. HCEs who are not President or Vice President of the Company). I would attempt to disguise a 410(a)(1) violation for any class of employees.

Good Luck!

[BG5150]

So, HCE's over 50 can put in the full $22,500?

Or are you trying to limit the HCE's to just catch-ups?

[austin3515]

FWIW it wouldn't be age discrminiation since the people who are being limited are the younger people.

Perhaps you could limit deferrals to $1 for all HCE's, thus alllowing those over 50 to do the catch-ups. The merits of this have been discussed ad nauseum in other posts, in particular how it relates to top-heavy minimums...

[mbozek]

IRC 411(b)(2) provides "A defined contribution plan satisfies the requirements of this paragraph if, under the plan, allocations to an employee's account are not ceased, and the rate at which amounts are allocated to the employee's account is not reduced, because of the attainment of any age. "

[austin3515]

But we're increasiong it because of an attained age, so do you agree that this would be OK? (bizaar, but OK?)

[mbozek]

But we're increasiong it because of an attained age, so do you agree that this would be OK? (bizaar, but OK?)

NO.

ERISA protects all employees regardless of age. Also IRC/ERISA prohibits a reduction of allocations to an employee's account on account of attainment of age.

What I am asking is why would any plan want to prevent deferrals by younger employees since it would discourage younger employees from continuing with the employer and separately violate the federal age discrimination law (ADEA) because it has a "disparate impact" on employees between 40 and 50 who are protected by the ADEA as well as employees over 50.

[GMK]

a "disparate impact" on employees between 40 and 50 who are protected by the ADEA as well as employees over 50.

My understanding is that disparate impact is an unproportional adverse impact on the protected group compared to the unprotected group. In this case, it looks like the protected group is treated the same (40 to 50 year olds) as or better (over 50's) than the unprotected group (under age 40).

For my future reference, are you saying that the analysis also applies to subgroups within the protected group (40 and over) without regard to the unprotected group? E.g., the impact of a policy on an employee age 60 cannot be disproportionately better than the impact of that policy on an employee age 42?

Just wondering, so I know what's correct if the issue ever comes up. Thanks.

[Doghouse]

Setting the ADEA issues aside, the reason an employer might find this attractive is in a situation where the ADP test is not passing. Those employees over 50 could still do a catch-up contribution, given the plan-imposed limit - but the employees under 50 woud actually be able to put more into an IRA than into this plan, given the ADP test results.

[mbozek]

Setting the ADEA issues aside, the reason an employer might find this attractive is in a situation where the ADP test is not passing. Those employees over 50 could still do a catch-up contribution, given the plan-imposed limit - but the employees under 50 woud actually be able to put more into an IRA than into this plan, given the ADP test results.

Just what part of a DC plan cannot reduce allocations to the plan on account of attainment of any age (IRC 411(b)(2)) dont you understand. This is an IRC/ERISA requirement and applies to employees at any age, e.g. 22 as well as 50.

[Tom Poje]

on the other hand, 1.401(a)(4)-2(b)(4)(v) does permit lower allocations for HCEs, 'allocations provided to one or more HCEs'

not even all the HCEs, so you can discriminate even amongst the HCEs.

I wouldn't push the age issue, though I'd be surprised if you can't figure out another way to impose a limit on the younger HCEs without using age directly.

not sure why you basically don't say HCEs can't defer (which means HCEs over age 50 get the catch up). This was in the original preamble to catch up contributions. some argue since that was not in the final regs you can't do it, because if you can't defer you can't get a catch up either. So then other say, fine, all HCEs limited to 1 cent.

[david rigby]

While ADP testing is mentioned above, could the real issue be top-heavy?

Just wondering.

[Doghouse]

Just what part of a DC plan cannot reduce allocations to the plan on account of attainment of any age (IRC 411(b)(2)) dont you understand.

Geez, no need to be rude.

The plan is not top heavy.

[mbozek]

Just what part of a DC plan cannot reduce allocations to the plan on account of attainment of any age (IRC 411(b)(2)) dont you understand.

Geez, no need to be rude.

Inquiring minds want to know.