Accrued Vacation as Contribution?

[austin3515]

Client allows ees to accrue up to 6 weeks of vacation, but then does not allow them to accrue any more.

They do not want to allow people to get any cash in there paycheck for the unused vacation time, but want people to be able to make an election to "close out" their accrued vacation in exchange for  a contribution to the Plan.

Since 401(k) is CASH or deferred, and they have no option of cash, my conclusion is that they cannot count it as 401k.  The only thing that gives me pause is I suppose they could just not work, and at that point would be getting the cash, but that does not seem to cut it.

Could thye have an employer contribution to accomplish this?  I don;t think there would be a good way to fit this into my plan document (standard prototype). Even though I have everyone in their group on this plan, something about this tells me that there should be more provisions around it.

Has anyone seen anything like this before?

[RatherBeGolfing]

17 minutes ago, austin3515 said:

Since 401(k) is CASH or deferred, and they have no option of cash, my conclusion is that they cannot count it as 401k. 

They could have a company policy that allows the employee to convert the accrued vacation to cash on the condition that it is 401(k) contribution.  That solves the cash/401(k) bit.  But it opens a whole other can of worms since the ER can't actually enforce the "deferral", and is it even an elective deferral if its required?

[Larry Starr]

Austin, you have hit on one of the very reasons we don't ever use prototypes; all our plans are volume submitter full documents.  We don't ever want to be limited except by what is allowed by law.  Having said that, and assuming that in no way would this be considered a CODA, and assuming the employees are not HCEs, and assuming that the value of the vacation time added to their normal allocations for a year would not exceed 415, then I would suggest a -11g amendment should work just fine.

[austin3515]

3 minutes ago, RatherBeGolfing said:

But it opens a whole other can of worms since the ER can't actually enforce the "deferral", and is it even an elective deferral if its required

Bingo, that's the million dollar question.

2 minutes ago, Larry Starr said:

Austin, you have hit on one of the very reasons we don't ever use prototypes; all our plans are volume submitter full documents. 

I mispoke, shame on me.  We use the Volume Submitter prototype FORMATTED document.  I was rushing...  But even still it just seems way too far outside the box for a pre-approved plan.  I'm thinking ERISA counsel to prepare some crazy amendment (unless I can talk my client out of it!).

I'm confused about your reference to an -11(g) amendment here.  We're not trying to correct anything for testing.  Have you seen this done before and if so, how did it happen?  I realize that it's a shot in the dark to see if you have ever seen it before...

415 would not be an issue, but definitely I agree HCE's would have to be out to make sure nothing falls apart.

[Larry Starr]

Austin: you surprise me. -11(g) amendments have NOTHING to do with testing! Surprised?  You shouldn't be.  When you "test" a plan for nondiscrimination and "fail", you actually have no idea if you have REALLY failed. There are hundreds of other combinations of testing parameters that you have not tried and one of them might show a PASS.  Thus, the -11g is just one way of proving that, given a certain testing methodology, you can prove that you are non-discriminatory.  But what the means is that you can do an -11g amendment FOR ANY PURPOSE YOU WANT and we do them all the time for many other reasons.  For example, a client wants to add an extra $10k to the allocation for a particular employee this year; so we do an -11g amendment that does just that.  Perfectly OK.

You just have to make sure that the -11g amendment meets the requirements of that section of the regs, and it is defacto fine, even if you apply it to a comp to comp PS plan!!!!

Now you know our secret.

So, would a -11g amendment solve your problem? I think it might.

 

[ESOP Guy]

Does this IRS guidance from 2009 help?  I am NOT an expert on it but I remembered there was some old guidance and I got this from Google.  You now know 100% of what I know but this might or might not point you in the right direction.

http://www.retire.prudential.com/media/managed/PruPA-UnusedPTO.pdf

https://www.irs.gov/pub/irs-drop/rr-09-31.pdf

[austin3515]

"The Larry Starr" is telling me -11(g)" is not related to testing? 

(2) Scope of corrective amendments. For purposes of satisfying the minimum coverage requirements of section 410(b), the nondiscriminatory amount requirement of §1.401(a)(4)-1(b)(2), or the nondiscriminatory plan amendment requirement of §1.401(a)(4)-1(b)(4), 

So do a -11(g) amendment OR just amend the Plan to add the provision.  I'll take the latter. But to each his own I guess.

Another thing I just thought of is that because my profit sharing source has a vesting schedule I would have to add a new source and provide that it is 100% vested.  Devil is in teh details!

[austin3515]

Score!!  Thanks ESOP GUY!!!

[Larry Starr]

Austin, you missed my point.  Of course  -11(g)(2) allows a retroactive amendment to correct minimum coverage etc etc, but that is not an exclusive allowance.    It is -11(g)(3)  that gives you the CONDITIONS for a corrective amendment, and if you meet all those conditions, the amendment is allowed whether it is for the purpose of meeting the item in -11(g)(2)  or not.  BTW, this is NOT controversial at all in the industry; it is now routine.

So yes, I do an -11g amendment that says "I'm adding $10k to Employee X allocation in addition to the regular allocation he is getting under the terms of the plan" (paraphrasing substantially) and I also have a line that says "it is intended that this amendment be an -11g amendment" (paraphrasing again).  Because you want to give the amendment retroactive effect AFTER the end of the plan year, it needs to be an -11g amendment.  If you do the amendment prior to the end of the year, it actually gets more complicated because now you do have to tie it in with the regular formula or allocations so that they dovetail and get the results you want.  -11(g) is easy solution.

[Larry Starr]

9 minutes ago, austin3515 said:

Score!!  Thanks ESOP GUY!!!

Note this from the posting:

If an employee does not have the right to elect to receive the amount of unused PTO as income, the dollar equivalent of the unused PTO must be contributed to the plan by the employer as a nonelective contribution. Alternatively, if an employee has the option to receive the amount of unused PTO as a cash payment and the amount is contributed to the plan, the contribution must be made as an elective deferral.

In your case, he doesn't have the option of getting it in cash, so it has to be an employer contribution.  If the employer only wants to do it for selective employees, the -11(g) works perfectly.  If he really want to make this a rule for all employees and has an actual PTO program, he can go this route and amend both the plan and the PTO so this is a regular feature.  To me, that just complicates it much more and takes away the employer discretion; it always comes up that "I HATE THIS EMPLOYEE AND DON'T WANT TO GIVE HIM ANYTHING".  Using the -11(g) route, we avoid that issue.

We do this dozens of times a year, BTW.

FWIW.

[austin3515]

2 minutes ago, Larry Starr said:

If he really want to make this a rule for all employees and has an actual PTO program, he can go this route and amend both the plan and the PTO so this is a regular feature. 

That;s exactly what I just told the client (and gave them a name of our favorite ERISA attorney :))

[Doghouse]

I tried this once before and got into trouble with 415 limits. Essentially, some of the individuals (not necessarily the high paid ones) had too much accumulated PTO, and together with other plan contributions, it caused an excess problem we hadn't anticipated. Be sure to keep those 415 limits in mind!

[austin3515]

https://www.ta-retirement.com/resources/TCRS 2009-07_RR09-31and09-32.pdf

Good write up by TransAmerica, a little more detailed than the Pru one.