employee deferrals

[EBDI]

We have a new client starting their first 401k plan. They have payroll twice a month, but the employer only wants to allow employees to defer from the last payroll of the month. I have been searching for IRS guidance on this and have struck out. Can anyone point me in the right direction? I also checked the plan document and can't find where it is addressed. My feeling is that they should have to allow employees to defer from every pay check.

[QDROphile]

Perhaps you would point out that it compromises the benefit considerably if it is a practical imposition. I think most peple like regularity in their take-home pay and may not particpate to the fullest if they have to accommodate material variation in cash flow. I don't think it is a legal problem if it is adequately described and administered. It will be something that will tick off some employee at some time who does not understnad the deal. For some others, they won't take the deal or they will reduce amounts.

[Kevin C]

If you have the current on-line EOB, you might want to look at the discussion starting on page 11.386. It says a "reasonable" definition of compensation for deferrals needs to be used or deferrals will fail to be effectively available on a nondiscriminatory basis as required by 1.401(a)(4)-4©. It goes on to say 1.414(s)-1(d)(2) provides a "reasonableness" test for a definition of compensation. I don't think every other pay day will satisfy that reasonableness test.

I also have to wonder if perhaps the owner gets paid once a month.

[ETA Consulting LLC]

I also have to wonder if perhaps the owner gets paid once a month.

I would've never thought to ask this. I'd bet the owner gets paid at the end of every month. The obvious result would be the owner being able to defer from 100% of his payrolls while the other employees being able to defer from only 50% of theirs. Good one.

I typically try to figure out why someone would ever imagine attempting to do something. Kind of disappointed in myself that I didn't think of this. Once you figure that out, it's often much easier to explain to the client why it won't work

Good Luck!

[K2retire]

I once spoke to a participant who only wanted to defer from the final paycheck of the month. She said it was because she didn't want the payroll person to have to bother with it every paycheck. She was somewhat incredulous when I explained that changing back and forth every pay period was more work than doing it once and leaving it alone.