401(k) Contribution required by: Employment Contract?!

I'd thought I'd seen it all, but here's a new one: a company and its CEO have a provision in his employment contract that requires him to get a (sizable) contribution to the Company 401(k) plan for the current calendar year.

The company does not otherwise offer a match or profit sharing or QNEC contribution.  I'm waiting to receive the plan documentation to confirm, but I don't see how this could pass nondiscrimination testing. 

I'll probably have the company revise the employment agreement contract so that the specified amount can be paid another way - but not in the 401(k).  Just wanted to share. Have never seen an outside contract specify a 401(k) contribution before. 

Do you all generally agree that this is a terrible idea?

it seems like they did not bother asking their ERISA experts what they think of this provision before writing. 

In the 1990s I saw a contract that obligated the employer to allocate, each year, to the chief executive's individual account under the employer's retirement plan the amount of the IRC 415 annual-additions limit.

The negotiator must have thought at least some about how that obligation related to coverage and non-discrimination conditions:  The contract specified also obligations that the employer provide, pay, and allocate contributions for all participants' accounts so that the plan would, during the chief's employment and throughout the year of her separation, be a tax-qualified plan.  And the contract specified that the chief was an intended beneficiary of the promises regarding contributions for all participants as needed to keep the plan tax-qualified.

The employer delivered a copy of that contract to the plan's recordkeeper and told it to design the least expensive plan that would meet the obligations to the chief executive.

I've seen it, and agree it is a bad idea.  Under certain circumstances, it might be do-able, but it's certainly ignorant to put that in a contract with no input from the plan side.

34 minutes ago, Bird said:

I've seen it, and agree it is a bad idea.  Under certain circumstances, it might be do-able, but it's certainly ignorant to put that in a contract with no input from the plan side.

Me too!  I've seen it done for a small company that was acquired by a larger company.  Once I ran the numbers to show that it would require an additional $1 million to other employees in order to pass non-discrimination, several attorneys' heads began to roll.

Good Luck!

Perhaps altering the contract to provide that those contributions be made to a non-qualified plan, rather than the 401(k), would help.

similar to the one we get a lot from our small employers..."We hired a new:  'CEO/Controller/or insert title' and put in the employment contract that she/he can participate immediately in the 401(k) plan even though we require a year of service.  Is that going to be a problem?"   

Happy New Year All!

43 minutes ago, pmacduff said:

similar to the one we get a lot from our small employers..."We hired a new:  'CEO/Controller/or insert title' and put in the employment contract that she/he can participate immediately in the 401(k) plan even though we require a year of service.  Is that going to be a problem?"   

Happy New Year All!

Or

"Well, we have a couple of employees we have never told you about because their employment agreement excludes them from all benefits so they were never eligible for the plan anyways...."

I used to see it quite often in physician employment contracts. But it's been awhile now since I've seen the last one. I've always told them that an employment contract doesn't override the plan document and ERISA. It seems most attorneys are starting to realize that.

It seems like a terrible idea, but in theory could be done with the right plan language, probably a plan amendment. The contribution would fail 401(a)(4) unless one or more NHCEs got a similar (but potentially lower) contribution as a percentage of pay and you satisfied the general test.