reduce compensation to offset match

WCC · May 15, 2018

Plan sponsor wants to match dollar for dollar up to $18,500. The catch is, the employees compensation will be reduced by the match amount. I don't think this is possible under the CODA rules. Ignoring ACP testing for the moment, is this even possible?

After I posted the question, I found this in the EOB. I think this answers my question, but still open to thoughts. Thank you

2. Facts and circumstances test for non-partners. When an election to waive or vary a contribution is offered to common law employees (including the common law employees of a partnership or sole proprietorship), the existence of a deemed CODA depends on the particular facts and circumstances. The IRS does not apply to common law employees the automatic deemed CODA rule described in 1. above. This is true even for shareholders of a corporate plan sponsor who are participants in the plan because they also are employees of the corporation. However, the election by a shareholder of the corporation to waive or vary the employer contribution made on his behalf to the qualified plan will be carefully scrutinized by the IRS. The IRS warns its field agents of this situation in its audit guidelines in Announcement 94-101. The guidelines include the following example to illustrate this issue.

2.a. Example. A profit sharing plan permits an employee to elect in or out of participation on an annual basis. For a 3-year period, Employee C elects out of participate for the first of such plan years, and then elects to participate for the other two plan years. Employee D elects to participate for the first and second of such plan years, and then elects out for the third plan year. C's and D's salaries increase and decrease for each of those years in a way that is roughly analogous to the contribution that would otherwise have been made to the plan. The guidelines state this arrangement is probably a CODA, but, if the facts and circumstances suggest that the changes in salary have nothing to do with the elections, it may not be a CODA. If C and D are shareholders of the corporation that maintains the plan, it will be difficult to prove that the elections do not have any effect on their salaries from the corporation.

3. Tax consequences of a deemed CODA/treatment as nonqualified cash or deferred arrangement. When a CODA is deemed to exist in a qualified plan, the contributions made to the plan pursuant to the CODA are taxed to the employees that are deemed to have elected those contributions, unless the CODA satisfies the requirements of IRC §401(k). See Treas. Reg. §1.402(a)-1(d). If a qualified plan contains a deemed CODA, but the CODA does not satisfy §401(k), the plan has a nonqualified cash or deferred arrangement. Under a nonqualified cash or deferred arrangement, all of the employees’ elective deferrals (i.e., contributions made by the employer which are deemed to be elective deferrals because of the existence of the deemed CODA) are includible in gross income.

Larry Starr · May 15, 2018

I don't see how the quoted material has anything to do with your question. How about you tell us exactly what the client proposes to do, how he is going to do it, and what you think the problem is?

Then, tell us how you think the quote from Sal's book answers any of the issues that arise from what the client wants to do.

Then, I think we will have something that we can get our teeth into and help parse the rules for your.

WCC · May 15, 2018

What they are trying to do is this:

Participant's salary is $100,000

Participant elects to defer $18,500

Employer provides a contract to this employee that says:

"Dear Employee, Employer will match dollar for dollar on your deferrals. However, every dollar we match directly reduces your salary. For example, if we match $18,500, your compensation paid monthly will be $100,000 minus $18,500 divided by 12 pay periods. Your monthly gross pay will be $8,333.33 ($100,000/12) minus $1,541.66 (your match). Sign this form and agree or you do not receive any match."

The section from the EOB refers to a deemed CODA.

Larry Starr · May 15, 2018

I'm going to suggest that this is possibly ILLEGAL as a violation of their ERISA rights. If the employer establishes a 401(k) plan, the employee has a legal right to defer under the terms of Code Section 401(k). By docking his salary for the employer match that the employee is entitled to, he is certainly penalizing the employee for exercising his ERISA rights, as his deferral of $18,500 actually reduces his take home pay by twice as much. The employer's option is to provide a match or not, but if they do, to me it is a clear ERISA violation to penalize the employee by reducing their pay by the employer's match.

If the client really want to do this, he needs an opinion from a very good ERISA attorney (who will no doubt actually tell him he can't do it!).

WCC · May 15, 2018

thank you, I appreciate your help.

Larry Starr · May 15, 2018

59 minutes ago, WCC said:

What they are trying to do is this:

Participant's salary is $100,000

Participant elects to defer $18,500

Employer provides a contract to this employee that says:

"Dear Employee, Employer will match dollar for dollar on your deferrals. However, every dollar we match directly reduces your salary. For example, if we match $18,500, your compensation paid monthly will be $100,000 minus $18,500 divided by 12 pay periods. Your monthly gross pay will be $8,333.33 ($100,000/12) minus $1,541.66 (your match). Sign this form and agree or you do not receive any match."

The section from the EOB refers to a deemed CODA.

Let me ask you another question: is it this one employee who really wants $36,000 contributed and it is the employee's desire to do this? if so, there is a way it can be done.

FIrst, the employer drops the salary by $18k. Then, the employee contributes the maximum 401(k) of $18k. The employee is NOT an HCE (at least by income; I'll assume not an HCE by any ownership rules). Now, at the end of the year, the employer does whatever he is going to do with an employer contribution to the plan, but in addition, he does a -11g amendment that provides an additional $18,000 to this NHCE. Same result; no ERISA violation.

WCC · May 15, 2018

This plan has about 90 ee's. The new decision makers are looking to cut out the match and came up with the idea to reduce the compensation for everyone who defers by making them sign an agreement as previously mentioned. They asked me my opinion to which I told them it could not be done and referred them to an attorney. I was curious if there really was a way to do this and posted the question here.

Your strategy is very interesting, something I have not thought about. thanks

Larry Starr · May 15, 2018

4 minutes ago, WCC said:

This plan has about 90 ee's. The new decision makers are looking to cut out the match and came up with the idea to reduce the compensation for everyone who defers by making them sign an agreement as previously mentioned. They asked me my opinion to which I told them it could not be done and referred them to an attorney. I was curious if there really was a way to do this and posted the question here.

Your strategy is very interesting, something I have not thought about. thanks

But it only works if that's what the EMPLOYEE wants; it doesn't work if forced on the employee.

Luke Bailey · May 16, 2018

The proposed provision violates the $18,500 deferral limit by whatever the match is. The plan design would make the match an elective deferral along with the conventional "elective deferral."

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