Plan Contribution in Lieu of a Raise

[DTH]

A governmental employer gives a 5% employer contribution into their 457(b) plan. The employer wants to give employees the option of receiving a 2% raise or in lieu of a raise the employer will put an additional 3% employer contribution into the plan. Thus, employees who elect their raise will get a 5% employer contribution and employees who elect no raise will get a 8% contribution.

My gut tells me this may be against state labor.

Has anyone see a governmental employer do this?

[Peter Gulia]

Has the employer's lawyer evaluated whether State and local law grants the employer to make a contribution beyond elective-deferral salary-reduction contributions?

[DTH]

In a 457(b) plan the employee pre-tax/Roth deferral contributions are added together with employer contributions towards the 457(e)(15) limit. So the deferral limit could come into play. If the combined employee/employer contribution is more than the IRS limit the employee would have an excess deferral that needs to be distributed from the plan.

These plans are not subject to IRS nondiscrimination testing so the employer can give different rates of employer contributions to different groups.

The question is really about pay raises and if the employer can give employees to option of getting a raise or in lieu of the raise get a higher rate of employer contribution.

I know an issue had come up with governmental 403(b) plans where an employer gave employees the option of medical coverage or getting the employer's portion in cash. The employer can't allow employee's who elected the cash option to have the option of taking cash or putting the cash into a 403(b) plan. This seems to be a similar scenario.

[Peter Gulia]

That something might not be precluded by Federal tax law won't matter if the employer does an act that is beyond its powers under State or local law.

[mbozek]

short answer to this question- Since almost all govt employees are covered by a collective bargaining agreement, review the agreement to determine if the employee can opt out of being paid a raise if it is contributed to a 457b plan. Most govt CBA mandate that employees must receive the raise in their paycheck. However, employee could elect to defer the raise as a 457b contribution. whether the employer can give an additional 1% if employee elects to defer raise is a matter covered under state labor law.

[david rigby]

Since almost all govt employees are covered by a collective bargaining agreement...

Whoa there cowboy. Not even close to "almost all", at least not in the SouthEast US.

[jpod]

Assuming there is some legal (non-tax) obstacle, can the concept be implemented by providing for a matching component?