profil sharing election - deferral limits

[Guest benefitstudent]

Employer has a non-ERISA profit sharing plan. In the past, all profit sharing amounts were deposited into employees' 401k accounts. Under a new CBA employees have an election to take the profit sharing amount in cash or have it paid into their 401k account.

If paid into a 401k account, against which limit is that amount charged? Is it treated like a salary deferral and charged against the $17,000 deferral limit or is it treated as an employer contribution and counted only against the aggregate $49,000 annual addition limit?

Are there any other issue raised by the introduction of the employee election about how to treat the profit sharing payment?

Thanks!

[Mike Preston]

What is a non-ERISA plan with a 401(k)? Sounds nonsensical to me.

[mbozek]

There are grandfathered 401k plans sponsored by governmental employers that were established before Congress eliminated 401k plans for govt employees in 1986. Example: NYC has a 401k plan for all city employees as well as a 457 plan.

[Mike Preston]

Unless it is a one time election that applies to all future amounts, it renders the amounts deferred as 401(k) deferrals and therefore subject to the 401(k) limit for that year.

[Guest benefitstudent]

What is a non-ERISA plan with a 401(k)? Sounds nonsensical to me.

The company has a DC Retirement Savings Plan (the 401k Plan) and a separate Profit Sharing Plan, the non-ERISA plan, that is used to pass through and distribute the profit sharing monies determined according to a formula for each work group.

The new feature is the election either to take the profit sharing monies in cash or as a 401k contribution.

The question is whether the election has any effect on the characterization of that contribution as an employer contribution, subject to the annual addition limit, or as an employee contribution, subject to the deferral limit.

[Guest benefitstudent]

Unless it is a one time election that applies to all future amounts, it renders the amounts deferred as 401(k) deferrals and therefore subject to the 401(k) limit for that year.

Thanks for your reply, Mike.

I haven't seen the contract language yet that describes the election yet, so can't say whether the election holds for any period longer than the present payment.

If we assume that there is an election available each time there is a profit sharing payment announced under the terms of the CBA, I understand your reply to mean that for that instant election, all employees who direct their profit sharing payment to be deposited into their 401k accounts will be charged the amount of that profit sharing payment against the deferral limit for that year.

What are the parameters of an election that applies to more than the upcoming payment? Annual, indefinite?

Can you direct me to the guidance on this point?

I appreciate your assistance.

[Mike Preston]

I'm still not sure that your use of the term "profit sharing plan" is correct. It sounds more like a bonus plan where people receive certain amounts and those amounts are taxable income. Am I correct?

The citation you are looking for is regulation section 1.401(k)-1(a)(3)(v) - Certain one-time elections not treated as cash or deferred elections. It is too long to quote here, but you should have no difficulty looking it up.

[QDROphile]

"I'm still not sure that your use of the term "profit sharing plan" is correct. It sounds more like a bonus plan where people receive certain amounts and those amounts are taxable income. Am I correct?"

Restart the conversation here. Don't get distracted by one-time election provisions. The original post created so much confusion that the responses have geneally been unhelpful. Provide details to describe the "profit sharing plan." It sounds to me like a bonus plan and you have a garden variety deferral question.

[Guest benefitstudent]

"I'm still not sure that your use of the term "profit sharing plan" is correct. It sounds more like a bonus plan where people receive certain amounts and those amounts are taxable income. Am I correct?"

Restart the conversation here. Don't get distracted by one-time election provisions. The original post created so much confusion that the responses have geneally been unhelpful. Provide details to describe the "profit sharing plan." It sounds to me like a bonus plan and you have a garden variety deferral question.

I think you are right and I am sorry about creating the confusion. I have not seen the plan yet. It was described to me as a "non-ERISA profit sharing plan" used to distribute the "profit sharing" monies based on earnings specified in the collective bargaining agreement.

So, let's agree it is a bonus plan.

In the past all amounts were contributed to 401k accounts. Now, employees eligible for a "profit share" can elect to receive cash or direct their share be deposited to their 401k account.

For those making the 401k contribution choice, will that amount be treated as part of their individual deferral limit or will that amount be treated as an employer contribution subject to the annual addition limit.

Have I stated my question more appropriately and clearly? I hope so!

And, I thank you all for your efforts to help. Most sincerely!

[QDROphile]

An election to defer an amount from the profit sharing payment (instead of receiving the entire payment) will count against the inidvidual's section 402(g) elective deferral limit and the amount will be an annual addition under section 415.

[K2retire]

Many clients make bonus payments to their employees that they call "profit sharing". Typically they have nothing to do with a 401(a) profit sharing plan. Could that be what they meant by "non-ERISA profit sharing plan"?

[Guest benefitstudent]

An election to defer an amount from the profit sharing payment (instead of receiving the entire payment) will count against the inidvidual's section 402(g) elective deferral limit and the amount will be an annual addition under section 415.

Thanks -- to clarify, is there any difference in treatment if the election only allows the entire profit sharing payment to be received in cash or the entire amount to be deposited in a 401k account versus an election that allows all or a portion of the Ps payment to be taken in cash and\or deposited in the 401k account?

Is it the fact of the election that determines the amount to the 401k counts against the individual's deferral limit?

I appreciate your help!

[Guest benefitstudent]

Many clients make bonus payments to their employees that they call "profit sharing". Typically they have nothing to do with a 401(a) profit sharing plan. Could that be what they meant by "non-ERISA profit sharing plan"?

I think this is correct. It is described as a Profit Sharing Plan and contains a statement that it is not subject to ERISA. it is separate from the PS 401k plan and is used only for CBA-defined payments based on earnings performance milestones defined in the CBA.

[QDROphile]

Any election that offers the choice of cash or a contribution is a CODA. The amount elected as a contribution will be counted under the section 402(g) limit. Making it an all-or-nothing choice does not change the application of the rule.

[Guest benefitstudent]

Any election that offers the choice of cash or a contribution is a CODA. The amount elected as a contribution will be counted under the section 402(g) limit. Making it an all-or-nothing choice does not change the application of the rule.

Thank you very much!