Discrimination

[Oh so SIMPLE]

An employer has had a new comparability plan with a safe harbor 401k feature (nonelective 3% of pay contribution from the employer) for a few years.

He has given much thought to it, and proposes that in addition to descriptive language in the SPD covering both of the following, the HR person would:

(1) personally counsel each new employee that is age 40 or older before his or her plan entry date that he or she has the option to sign a one-time, irrevocable election out of all plans of the employer and receive a 5% of pay raise in lieu of plan participation, and

(2) give all employees when signing up for 401k elective deferrals a written explanation that if he instead chooses to make a contribution to an IRA, it may yet be tax deductible and the employee would have more control over the investments and more withdrawal access, not being subject to the distribution restrictions on 401k benefits.

Any problems?

[ETA Consulting LLC]

(1) personally counsel each new employee that is age 40 or older before his or her plan entry date that he or she has the option to sign a one-time, irrevocable election out of all plans of the employer and receive a 5% of pay raise in lieu of plan participation, and

So, you're going to put in a plan and then pay an employee to waive participation. Mathematically, it would cost any employee who decides to participate 5% of compensation; since the 5% raise will represent an opportunity cost. I would, personally, like to see them try it. You try to anticipate what the IRS would counter with (assuming the plan is audited).

(2) give all employees when signing up for 401k elective deferrals a written explanation that if he instead chooses to make a contribution to an IRA, it may yet be tax deductible and the employee would have more control over the investments and more withdrawal access, not being subject to the distribution restrictions on 401k benefits.

Any problems?

So, you're going to sell the employees against plan participation; and argue that contributions to an IRA "may" be tax deductible (without performing the appropriate analysis), and forego the certainty of tax treatment with the 401(k) plan.

I have an explaination: Technically, a business owner can put in a Safe Harbor 401(k) and pay $4.15 for every dollar deferred up to 6% of salary. If that owner can induce all employees not to defer, then the owner can get an employer contribution of 25% of salary in addition to an elective deferral. When that business owner blatantly stacks the deck to make this happen, or even attempt to 'move slightly in this direction', you have a facts and circumstances argument that the owner is placing his personal interests above those of his employees; a fiduciary breach.

Good Luck!

[BG5150]

Not commenting on the merits of the proposed scheme, but keep in mind that people who irrevocably waive out are included in coverage testing and includable and not benefiting.

[Bird]

The HR person either knows too much (just enough to be really dangerous) or too little. This is going to blow up sooner or later; prior responses are on point.