Additional SH & PS

[Becky Schwing]

Employer terminated employee.  Reached a settlement agreement to pay former EE a certain amount of money upon termination.  ER is thinking they now don't have to pay the former EE any 2019 safe harbor non-elective or subsequent gateway minimum in the profit sharing because this agreement stipulated that if she took this settlement money the employer was not obligated to give her any additional funds of any type - including plan contributions for the 2019 plan year in which she terminated.  I don't think this is permissible but wanted to see if someone had any idea if this was even possible to do.

[CuseFan]

I don't think they can do that, and the employee cannot even voluntarily waive the contributions. Hopefully not everything is finalized - what should have been done is have the total settlement include and subsequent payment be offset by the 2019 contributions. Maybe the settlement agreement has some offset language already. Or maybe the employee (and/or lawyer) was very knowledgeable and agreed to the settlement knowing contributions would have to be made regardless.

Just highlights the fact that all the employment related issues should have been/need to be thoroughly examined and discussed with qualified counsel for each (not necessarily legal counsel) before agreements are finalized.

[ratherbereading]

This happened with one of my plans  2 or 3 years ago.   We had the trustee draft a letter and the participant signed it stating they forfeited all rights for future contributions -- something like that.  It was an ugly breakup and they gave the participant a bonus upon termination because they wanted to get rid of them. So no PS or SH for them. 

[Larry Starr]

20 hours ago, Becky Schwing said:

Employer terminated employee.  Reached a settlement agreement to pay former EE a certain amount of money upon termination.  ER is thinking they now don't have to pay the former EE any 2019 safe harbor non-elective or subsequent gateway minimum in the profit sharing because this agreement stipulated that if she took this settlement money the employer was not obligated to give her any additional funds of any type - including plan contributions for the 2019 plan year in which she terminated.  I don't think this is permissible but wanted to see if someone had any idea if this was even possible to do.

Of course that can't be done.  Employees don't have the option of "waiving" their contributions, otherwise employers would be "encouraging" such an action all the time.  Frankly, who cares what the employer is "thinking". They don't know the law; that's why they pay us.  The employer has to be told that this is just not legal.  No more than trying to force an employee to pay back a loan made to the participant by the employer (not the plan) from the retirement plan distribution to that employee.

[Larry Starr]

1 hour ago, ratherbereading said:

This happened with one of my plans  2 or 3 years ago.   We had the trustee draft a letter and the participant signed it stating they forfeited all rights for future contributions -- something like that.  It was an ugly breakup and they gave the participant a bonus upon termination because they wanted to get rid of them. So no PS or SH for them. 

What made you think this was legal?  It isn't.  I'd say this plan has a problem that you caused and now should be fixed, but probably won't.

[ratherbereading]

1 hour ago, Larry Starr said:

What made you think this was legal?  It isn't.  I'd say this plan has a problem that you caused and now should be fixed, but probably won't.

First, Larry, I didn't decide to do this willy nilly. Second, we have ERISA attorneys on staff as well as our owner, who knows what he's doing (with at least as many initials after his name as you have, lol!)   We are one of the top TPAs in the country.    So, no, I didn't cause any problem, it was totally legitimate. If I remember the plan involved  I shall give you the details.

[Gadgetfreak]

Isn't this severance compensation (for services not rendered)? Wouldn't that be excluded from Plan compensation? I don't see where the OP stated WHEN the employee was terminated. Doesn't that matter?

[Bill Presson]

21 minutes ago, ratherbereading said:

 If I remember the plan involved  I shall give you the details.

I would be very interested in this.

[RatherBeGolfing]

3 hours ago, ratherbereading said:

 If I remember the plan involved  I shall give you the details.

 

3 hours ago, Bill Presson said:

I would be very interested in this.

Ditto!

[ratherbereading]

My memory of the events was a little fuzzy so my original post was a little off.  What actually happened was the plan in question was amended to exclude the participant from any employer contribution for 2015.  Per the legal settlement agreement with the employer (she had sued them for discrimination), upon her voluntarily termination in 2015, she waived all rights to any employer $$ in exchange for a $110,000 settlement from the employer.

[Luke Bailey]

ratherbereading (so would I, btw), anticipating that you may still get some pushback notwithstanding that this was done by plan amendment, I would point out that there is some tension in the nonqualified CODA rules surrounding what exactly constitutes an "election." Although every situation is unique and this is to a great extent a facts and circumstances issue, putting aside the timing of the amendment (e.g., how late in the year it was, whether the participant had already satisfied the allocation conditions, whether the contributions in question were completely discretionary, all of which are important), every negotiation ends in an agreement of some sort, which means both parties "agree." Whether the participant's agreement to something at the end of a negotiation constitutes an "election" by the participant can be of a gray area, to be sure.

[Larry Starr]

On 9/19/2019 at 10:36 AM, ratherbereading said:

First, Larry, I didn't decide to do this willy nilly. Second, we have ERISA attorneys on staff as well as our owner, who knows what he's doing (with at least as many initials after his name as you have, lol!)   We are one of the top TPAs in the country.    So, no, I didn't cause any problem, it was totally legitimate. If I remember the plan involved  I shall give you the details.

I understand all that, but we all make mistakes (I thought I made one once, but I was mistaken!).  As originally outlined, I am quite certain of my response being correct.

Now, we have this "minor" additional point that you added which was left out of the original: "What actually happened was the plan in question was amended to exclude the participant from any employer contribution for 2015."  

Well, as Emily Litella would say: "Oh, that's different; never mind!"

The participant wasn't "waiving" anything from the plan as (assuming the amendment was legitimate), she wasn't entitled to anything from the plan!

Gee, sure does make it different when we have the full facts, doesn't it? ?

Larry.

[rocknrolls2]

I agree that a participant cannot waive an allocation of employer contributions to his/her account, even if it is done in connection with a settlement of an emplohment dispute. I did want to interject the point that a lot of this anguish could have been avoided if the plan document required employment on the last day of the plan year as a condition to receiving an allocation of employer contributions. To the extent this is a safd harbof 401(k) plan, I understand that this mighg not be available to the extent the plan is using nonelective contributions to meet the safe harbor. I agree with Luke Bailey's point about the timing of a plan amendment if the plan did not already condition employer contributions upon employment on the last day of the plan year and was beinh amended to do so.

[ratherbereading]

17 hours ago, Larry Starr said:

I understand all that, but we all make mistakes (I thought I made one once, but I was mistaken!).  As originally outlined, I am quite certain of my response being correct.

Now, we have this "minor" additional point that you added which was left out of the original: "What actually happened was the plan in question was amended to exclude the participant from any employer contribution for 2015."  

Well, as Emily Litella would say: "Oh, that's different; never mind!"

The participant wasn't "waiving" anything from the plan as (assuming the amendment was legitimate), she wasn't entitled to anything from the plan!

Gee, sure does make it different when we have the full facts, doesn't it? ?

Larry.

Yes. I do agree with you there! 

[Below Ground]

You can't do this.  It would be a violation of the non-assignment anti-alienation clause.  I believe this must be in every plan document.  For example, FT Williams has this language under Section 14.01 of their DCP Master Document...  "Except as provided in Section 14.01(b), the Trust Fund shall not be subject to any form of attachment, garnishment, sequestration or other actions of collection afforded creditors of the Company, Participants or Beneficiaries under the Plan and all payments, benefits and rights shall be free from attachment, garnishment, trustee's process, or any other legal or equitable process available to any creditor of such Company, Participant or Beneficiary. Except as provided in Section 14.01(b), no Participant or Beneficiary shall have the right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments which he may expect to receive, contingently or otherwise, under the Plan, except the right to designate a Beneficiary."  Please note "no Participant or Beneficiary" is also included, thus this prohibition impacts not only the Employer.  Hope this helps.

[Kevin C]

Some things for the OP to consider:

Failure to follow the plan document disqualifies the plan.  That's why we have EPCRS.

A safe harbor plan can't be amended mid-year to make someone who is eligible for the SH contribution become ineligible for it. 1.401(k)-3(e)(1) and specifically mentioned in Notice 2016-16 III.D.2

One of the requirements for the non-elective safe harbor is that all NHCE's who are eligible to defer must receive the SH contribution 1.401(k)-3(b)(1). 

411(d)(6) prohibits amendments that reduce benefits that have already accrued. So, no retroactive amendment to make someone ineligible for deferrals or SH.