401(k) participation by credit card tips

My employer (state of California) has a policy ( that they say they will not change) of cashing out credit card tips on a daily basis to employees.  As such we do not have the opportunity of deferring that income into the 401(k) plan.  Try as I might I cannot find any law that requires the employer to leave the tips on the paycheck if requested by the employee.  It seems to me that this would violate the definition of compensation and would put their safe harbor 401(k) plan in violation.  Any help is greatly appreciated.  Thanks in advance

Whose sh? The state of California? Really? 

??????

I get it now.  Sorry.  You didn't mean that your employer was the state of California.  You meant that your employer was located in the state of California. 401(k) plans for companies who have employees that receive tips as part of their income are notoriously complex arrangements.  While it is certainly possible that your employer is doing something wrong, it is also quite possible that things are just fine.  The basic rule is that the compensation that a safe-harbor plan must use is defined in Internal Revenue Code section 414(s) and its regulations.  There is no requirement to use any specific definition and the regulations allow for an almost unlimited number of variations.  The basic premise, however, is that the definition of compensation can't discriminate against those employees who aren't highly compensated (generally those who make less than $120,000/year).

There are a number of ways that a plan's definition of compensation might satisfy 414(s), so one can't say that by excluding cash tips a plan necessarily violates the rule that a safe harbor plan must use a definition of compensation that satisfies 414(s).

So your employer won't take the deferrals out of your paycheck based on the reported tips plus wages?

I ask because my daughter worked her way through nursing school as a waitress.  It was in MO not CA where she worked.  They either had to or did cash out tips nightly also.  But I convinced her to get into the habit of saving for retirement and she agreed to put a few percentage points of pay into the resturant's 401(k) plan.  There were times where she got a zero dollar pay check.  It was caused by the fact when they got done taking out taxes and everything and applied her 401(k) deferrals to her wages plus tips there was no money left to pay her.  In fact as far as we could tell if she had good weeks with tips she should have had a negative paycheck based on the math but obviously they cut off the deferrals at the point her check reached zero. 

I point this out to see if it is happening or as an idea to take to your employer to see if they can and/or will do it.  At least then you are getting a deferral on some of your tips. 

As pointed out my guess is what they are doing is legal but hard to tell for sure based on the limited facts. 

I think you want to read your SPD carefully or request a copy of the legal plan document to see how compensation is defined for purposes of computing the amount of one's elective deferrals.  We can't tell whether the plan is being operating consistent with the plan document.