501c3 / 401k Plan

[austin3515]

Non-profit sponsors 401k. Executive Director's spouse is an employee (and is an NHCE). What's stopping me from giving the spouse a big generous profit sharing contribution, all the way up to the 415 limit? I can't do it for the ED because he is an HCE. Assuming ED is happily married, isn't this a clever way to give this guy an extra contribution? I don't think there is anything in the Internal Revenue Code stopping me (my Doc allows for different allocation rates for each employee, and we're on the PPA Volume Submitter).

Is there some non-profit law that perhaps someone knows of that will trip me up? In other words, it sounds too clever, too cute, and therefore, perhaps, too good to be true? Or do I add this to my non-profit plan design repertoire?

[jpod]

This could be a big stretch, but the excise tax exposure under IRC Section 4958 for excess benefit transactions may come into play.

[austin3515]

I don't think its a stretch - I think the point is, make sure the total comp including the benefit is not an "overpayment". So we would need to be able to justify the comp in total. Are there 3 people with the same position as the spouse? Is her "total comp" $75K while theirs is $40K?

[ETA Consulting LLC]

I agree that it is not a stretch. The non-discrimination rules and 415 limits are clearly defined. Maximizing ANY NHCE to the 415 limit would not violate either of these rules. So, from a Qualified Plan perspective, I don't see an issue. From a organization planning perspective, there could be questions as to how you would justify such a substantial contribution to any single employee's account; but that would be beyond the scope of the plan.

Good Luck!

[jpod]

I said "could be" because beyond knowing that 4958 exists everything else i know about it could fit in a thimble. This issue needs to be punted to the organization's CFO/Board.

[austin3515]

So I shouldn't say "jpod told me this won't work"