Deferring on non-cash items

[fiona1]

John gets paid $3,000 in gross wages on a bi-weekly basis. He has a 5% deferral election, in which case $150 is contributed to his 401(k) every pay period.

John's employer has a restricted stock program. The stock will vest on 11/1, and the value will be reported on John's first paycheck on November - and then subsequently reported on the W-2 at the end of the year.

The 401(k) plan uses W-2 as the definition of pay - in which case restricted stock is counted as plan compensation. And the plan does not exclude anything from the compensation used to calculate deferrals. Therefore, the 5% election for the first paycheck in November must be applied to the gross comp for that pay-period, which will include the value of the restricted stock.

If the value of the stock is $15,000 - then you take 5% x $18,000 to come up with a 401(k) deduction $900. So John's paycheck is going to be a little less this pay period.

But what if the value of the stock is $120,000? 5% of $123,000 is $6,150. What do you in that situation? Take out any other pre-tax deductions and then put the rest into the 401(k) plan? So John wouldn't get a paycheck for this pay period? Do you have to take out the rest on the next paycheck? or the paycheck after that?

We'll assume the employer doesn't want to amend their plan to exclude this pay from the calculation of deferrals.

[ETA Consulting LLC]

At the end of the day, it is still a "Cash" or Deferred Arrangement. The additional Compensation would do nothing but increase the actual amount of "cash" he would defer. In the event there isn't any additional cash as he approaches his deferral election, then nothing would be deferred.

It may be a good idea to advise the participant of this effect when those additional amounts are going to hit payroll; and have the participant to change their election accordingly.

Good Luck!

[fiona1]

Thanks for the reply. So when you say: In the event there isn't any additional cash as he approaches his deferral election, then nothing would be deferred. - you agree that if the 5% election exceeds the cash available, then then entire paycheck would be deferred - but nothing further would need to be deducted from future paychecks, correct?

[QDROphile]

If the circumstances are not covered by plan terms, then a written interpretation or polciy should be adopted to describe handling. It would also be a good idea to have a description in the SPD or an SMM that is given to particpants in arrangements that provide for compensation that is not cash compensation. John might be put in a bind or might otherwise be unhappy about a short pay check. A more active approach would be direct contact in advance, with enough time for a change of election.

[david rigby]

Not to imply you can't read, it may be prudent to review the plan definition of compensation, just to make sure.