Profit Sharing contribution promise

[Santo Gold]

In late 2023 we calculated the 2023 profit sharing contribution allocation for a 401k plan.  Only 4 participants shared in it (1 HCE).  The profit sharing is optional and is allocated on a cross-tested basis, each participant as its own allocation group.

The PS amount for each participant was communicated to each participant.  The NHCE's allocation was more than the minimum needed to pass testing.

Early 2024, one of the NHCEs is leaving the company.

Can the employer change only his allocation to a lower amount (enough to still pass testing)?  Since the employer previously informed the participants of their 2023 PS allocation, is it a problem to go back and change that allocation to a lower amount just for this specific NHCE?

Thank you

[Belgarath]

Was there a corporate resolution done specifying the contribution amounts to each participant?

I think this is a question for the lawyers. I don't know if whatever was done created a right to the allocation under applicable employment/contract law, etc.. I'll be interested in the responses! 

[Santo Gold]

At this point, there is no resolution stating the contribution.

[Paul I]

Definitely leave this up to the employer in conjunction with their legal counsel.  The facts smack of retaliation against a terminating employee.

A lot will hinge on the wording of communication that was given to the employees.  If the wording is definitive (e.g., "you will get $$$", "your 2023 PS contribution is $$$"...) and there is no disclaimer that these are not final numbers, then the employee may be disgruntled enough to challenge a lesser amount.

Precedent also could play a part.  In the past, if nobody's contribution was reduced if they terminated after the communication to employees was given out and before the contribution was finalized with the employer resolution, then lowering the contribution for this terminated employee reinforces the idea that this a form of retaliation for the employee leaving.

Similarly, the perception of other employees about how the employer handles the situation may be a consideration.  People talk.

Unless there is clear justification for making the change, it may make sense for the employer to avoid the negatives and move on given the potential cost in terms of time and money.  That is their decision.

 

[Bird]

I'm not a lawyer but I don't think that "telling" them of their allocation means anything in terms of locking in numbers. IMO the whole issue boils down to "is it worth the potential hassle?" If someone sics a lawyer on you then you've both lost, no matter the actual outcome.

[David Schultz]

This would be a facts-and-circumstances situation, but verbal promises by the PA/PS on behalf of the plan are still promises.

Could an employer elect a discretionary matching contribution in the plan document, but tell all of the employees in an enrollment meeting that there will be an unlimited 100% match allocated at the end of the PY, then elect not to make any match since the plan provides that the match is "discretionary"? 

It isn't just the plaintiff's attorneys I'd be concerned about.  I suspect the DOL would take an interest if informed by the employee that the plan sponsor is [ ... what's that term? oh, yeah ... ] cutting back on promised (and accrued) benefits.  Whether or not benefits were promised verbally is going to depend on who said what to who and how.

[Roycal]

Absent an error, I don't see how you can "unallocate."  Of course, this begs the question, what constitutes an allocation?  From your facts there's not enough here to tell.  I agree with others that the client should consult his ERISA legal counsel on this one.  Moreover, it we're not talking about much money, just let it go.