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Employer Nonelective Contribution - Election Timing


ecphcs2

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Plan provides for nonelective employer contributions and permits an election with respect to the time and form of payment.  For a newly eligible employee, it seems the 30-day rule would apply to permit an election regarding time and form of payment within 30 days of initial eligibility.  

The 30-day rule includes the requirement that the deferral election can only apply to compensation paid for services performed after the election.  

If the only contributions are nonelective employer contributions (thus the employee can't choose whether or not to defer it to the plan), does the requirement that the election apply to compensation paid for services performed after the election have any application?  In other words, if the employee becomes eligible on March 1 and makes a time and form of payment election within 30 days of March 1, and the employer makes a $5,000 discretionary contribution on November 1 - is the time and form of payment election applicable to all of the $5,000 discretionary contribution?  It seems that it would be.   

 

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  • 2 weeks later...

Unfortunately, I don't have a definitive answer for you.  Since you haven't received a response yet, though, I can brainstorm with you a little bit.

I do agree the 30-day rule for "First year of eligibility" applies here.  So long as the participant is newly eligible, (s)he should have 30 days from initial eligibility to make the election.  If (per your example) the participant makes the election within 30 days of becoming eligible on March 1, it should apply to everything after that.  Even though the "First year of eligibility" rule talks about "deferral election," the regulations provide that "an election to defer includes an election as to the time of payment" (i.e. distribution election).

The only question in my mind is the language in the regulation that provides that the 30-day rule only applies as to "compensation paid for services to be performed after the election."  Back to your example, there is a $5,000 discretionary contribution on November 1 -- when was the discretionary contribution earned (i.e. when were the services performed for the contribution)?  I think it is fair to say it can't be from before March 1, since a plan contribution isn't likely to be earned before participation in the plan.  But, the IRS could find the contribution relates to services performed starting March 1 -- if the election wasn't made until March 31, some of the discretionary contribution could, arguably, have been earned before the election (so any portion of the discretionary contribution from March 1 - March 31 would be subject to the default distribution provisions of the plan).  This is the potential issue I see.

I don't think it makes a lot of sense for the IRS to apply the 30-day rule to distribution elections pursuant to the previous paragraph, but the IRS doesn't always make sense.  I can see a few ways around this, just to be safe.

  • Have the newly eligible employee make his/her election before becoming officially eligible
  • Make a rule that a person does not become eligible until he/she makes his/her election.
  • Make it clear somehow that the November 1 discretionary contribution is earned on November 1, and not for any previous time period. 
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