Grandfathered CODA

We have a plan that has a 5% PS contribution.  Many years ago they permitted employees to receive the 5% as cash instead of the PS.  They eliminated that option but we still have a handful of employees still receiving the cash instead of the PS.    Would this be permitted?  Would that make the entire ps a coda even though they no longer have the option to take as cash?

How are they still receiving the cash if that option was eliminated?  What are the normal allocation conditions in the PS plan and are the folks getting cash now NOT getting PS? 

Feels pretty facts and circumstances as to whether or not this is still hiding as a deemed CODA.

That is what we are questioning on how they are still able to receive the cash.  Last day no hours for allocation conditions.  They are not receiving the PS allocation to the plan.

Seems a bit fishy to me.  

*especially* if it's a uniform allocation formula for the 5% (as opposed to individual allocation classes, where everyone might be assigned an identical 5% but only if that's the way the sponsor wants it)

Agreed, the deemed CODA guidance which would apply to partners in a partnership is a facts and circumstance test for employees.  This facts and circumstance is based on the participant's capacity to elect a contribution or not year by year.  However, a one-time irrevocable election would not be a deemed CODA.

How long ago was "many years ago"?  Formal, tax-deferred profit sharing plans came into existence in 1916.  Cash or deferred arrangements - CODAs - where employees were given a choice to receive cash now or have tax-deferred contribution made to a profit sharing plan became a popular benefit in the 1950s.  The IRS Revenue Ruling 56-497 addressed principles of coverage and nondiscrimination.  A period of controversy followed which put a damper on new CODAs and ERISA did not address them.  The Revenue Act of 1978 subsequently included section 401(k), but it was not until November 10, 1981 when 401(k) regulations were published that CODAs began their meteoric rise in popularity.  (I know, because I led the implementation of the plan accounting system for a 9000+ participant 401(k) plan that received the 3rd IRS plan approval.)

From the point of the release of regulations going forward fundamentally, if the plan gives an employee the right to receive a contribution in cash now or defer the contribution before it is received into a tax-deferred plan, then the plan is subject to all of the 401(k) rules and regulations.

Justatester, the plan's sponsor likely is very proud of their generosity towards their employees and the simplicity of their profit sharing plan.  I don't envy your breaking the news to them.

It appears to be from around 2006.  No, I am not looking forward to breaking the news to them.  Not sure if they meant it to be a CODA.  The client indicated in the "past" they had their choice but no longer do...I am thinking they should have started giving these participants the PS amount.   Not sure there is a good fix here.  The good news is they pass adp testing with or without the coda...so we have time to resolve the issue.  

Is the PS contribution immediately vested?   If not, taking the position this is a CODA could trigger a whole other topic of whether individuals who left employment before reaching full vesting were underpaid.  There also could be issues with in-service withdrawals before age 59 1/2.

If the plan has immediate vesting and no in-service withdrawals, then they can try to take the position that it operated like a CODA and everyone is in the same place they would be if the plan had all the 401(k) features in place.  This would of course also mean that no one's contribution exceeded the annual deferral limits.

Too bad anonymous VCPs are no longer available.  Good luck!