Tipped Employees and Deferrals

We have a restaurant client that is having an issue with their tipped employees that are deferring into their plan.  I have had large restaurant chain clients in the past and this was never a problem, so I am trying to see if anyone has run into this and if so, how did you handle? 

If their tips are paid in cash, some of the employees, after taxes and deductions have $0 paychecks, so there is nothing to take the deferral from.  They discussed requiring the employees to give the cash back to the employer to make the deposits, but is that the best solution?  Another thought was to exclude tips but then I am not sure they would pass 414(s). 

Any thoughts, guidance is appreciated.     

This is always an issue with tip income.  First time I saw it was in the 90's.  The only time I have seen it work well was where most of the tips were on credit cards and the employer kept the credit card tips and paid those out on the paycheck.  I have seen a restaurant where bulk of tips in cash tried to get the waitstaff to pay them nightly an amount of cash that with any credit card tips would get them to the amounts reported as tips by the waiter/waitress (which was usually the minimum 8%).  My recollection was that this didn't work that well.  I don't know of any authority that really lays out what to do here.  Note this is also problematic if welfare benefits are provided and paid through a 125 plan.  

There has been discussion on this issue in the past. If you use the search box you might be able to dig up the thread. From memory, there were two key points: 1. the plan should have some kind of written administrative procedure that says deferral elections will be honored only to the extent possible, taking into account the actual compensation available after other withholdings and deductions, and 2. cash tips, while still compensation, can't be used to fund deferrals, because in order to be a deferral it has to be paid by the employer to the trust before it is received by the employee, and that can't happen if the employee received the tip in cash.

2 hours ago, C. B. Zeller said:

There has been discussion on this issue in the past. If you use the search box you might be able to dig up the thread. From memory, there were two key points: 1. the plan should have some kind of written administrative procedure that says deferral elections will be honored only to the extent possible, taking into account the actual compensation available after other withholdings and deductions, and 2. cash tips, while still compensation, can't be used to fund deferrals, because in order to be a deferral it has to be paid by the employer to the trust before it is received by the employee, and that can't happen if the employee received the tip in cash.

katdmin, I participated in that prior discussion and my main takeaway was surprise that this problem has not received more attention. I think a lot of restaurant 401(k)'s exclude wait staff for this reason, with attendant 410(b) issues, of course.

On 1/19/2022 at 4:52 PM, Artie M said:

This is always an issue with tip income.  First time I saw it was in the 90's.  The only time I have seen it work well was where most of the tips were on credit cards and the employer kept the credit card tips and paid those out on the paycheck.  I have seen a restaurant where bulk of tips in cash tried to get the waitstaff to pay them nightly an amount of cash that with any credit card tips would get them to the amounts reported as tips by the waiter/waitress (which was usually the minimum 8%).  My recollection was that this didn't work that well.  I don't know of any authority that really lays out what to do here.  Note this is also problematic if welfare benefits are provided and paid through a 125 plan.  

 

Thank you!  The welfare benefits were brought up in a call last week.  They said those that are on their health/dental actually receive an invoice and pay the employer outside of their checks.  Our ERISA attorney told them that would not work with 401(k) deductions. One thing they mentioned was that they take the tips the employee receives (he didn't specify cash or credit card tips) and pay them out at the end of the shift on a debit card (after they've tipped out the support staff (bussers, etc).  

On 1/19/2022 at 5:05 PM, C. B. Zeller said:

There has been discussion on this issue in the past. If you use the search box you might be able to dig up the thread. From memory, there were two key points: 1. the plan should have some kind of written administrative procedure that says deferral elections will be honored only to the extent possible, taking into account the actual compensation available after other withholdings and deductions, and 2. cash tips, while still compensation, can't be used to fund deferrals, because in order to be a deferral it has to be paid by the employer to the trust before it is received by the employee, and that can't happen if the employee received the tip in cash.

Thank you!  I tried to search, but I don't know if I am technologically challenged or what, ok I admit it, I am , but I couldn't find anything.

On 1/19/2022 at 7:30 PM, Luke Bailey said:

katdmin, I participated in that prior discussion and my main takeaway was surprise that this problem has not received more attention. I think a lot of restaurant 401(k)'s exclude wait staff for this reason, with attendant 410(b) issues, of course.

Luke, it is crazy!  I used to have several large restaurant chains at a prior TPA I worked at (it could be one where they wear tight orange shorts) and I don't recall this coming up.  But I think maybe because those employees never met the YOS eligibility or they just didn't want to defer. 

I appreciate everybody's responses.