H&W Fringe Benefit Employer 401k contribution

[Coleen]

I have opted out of the healthcare plan at my current employer since I have healthcare through my husband.  Since I opted out of our healthcare, my employer is contributing $4.54/hour to my 401K.   My employer adds this money into my weekly pay as "misc income" and then deducts it as H&W 401K.  Is this legal or should my employer be contributing separately to my 401K and not through payroll?

 

 

[Bill Presson]

Most flexible benefit (or cafeteria) plans have "cash-in-lieu" options which it appears you've elected. That means that you technically elected cash rather than a healthcare plan. Their plan also appears to then require that "cash" to be contributed to the 401(k). So, that's how they're handling it. Since 401(k) contributions don't enjoy the exact same tax benefits as a cafeteria plan, running it through payroll ensures the appropriate taxes are paid (ie FICA).

[rocknrolls2]

Please be very careful here not to run afoul of Section 401(k)(4)(A) which prohibits any benefit which is contingent upon an employees deciding whether or not to make elective deferrals to a 401(k) plan, other than a matching contribution.

[Patricia Neal Jensen]

Your employer is doing this correctly.  This is NOT an employer plan contribution.  This is technically an employee contribution and so should be run through payroll and deferred for income taxes but not other payroll taxes (FICA, Medicare etc).   This is not contingent on a decision by you about making deferrals.  If you don't make deferrals, you simply have more taxable income than you did before this transaction.

[JAA-560]

It sounds like it is potentially a QNEC that is being made to fulfill the employer's health and welfare fringe benefit requirements under the Service Contract Act.  The 401k plan would need to be amended to allow for such QNECs (which presumably it has).