Employer requiring employee to reimburse Safe Harbor payment

I am an employee of a small law firm. I am "of counsel". 4 years ago, my employer complained that he had to make a Safe Harbor payment into the Profit Sharing Plan for me in the amount of 3% of my compensation. Since it was not addressed in my employment agreement, he pressured me to reimburse the 3% payment. Each year since I have done so, with $500 deducted from my pre-tax compensation calculation ever two weeks. To my knowledge, no one else at the firm has been required to do so but nearly all others are salaried employees. I am starting to think this practice violates the Safe Harbor rule and is not legal. That is, it seems this does qualify as a Safe Harbor contribution if the employer is reimbursed for the entire payment. Am I right? If so, what is the proper way to address it?

are you saying that you have a retirement account, which safe harbor contributions are deposited into, and you are also paying the firm back those same amounts via payroll reduction?

1 hour ago, Curious Employee said:

I am an employee of a small law firm. I am "of counsel". 4 years ago, my employer complained that he had to make a Safe Harbor payment into the Profit Sharing Plan for me in the amount of 3% of my compensation. Since it was not addressed in my employment agreement, he pressured me to reimburse the 3% payment. Each year since I have done so, with $500 deducted from my pre-tax compensation calculation ever two weeks. To my knowledge, no one else at the firm has been required to do so but nearly all others are salaried employees. I am starting to think this practice violates the Safe Harbor rule and is not legal. That is, it seems this does qualify as a Safe Harbor contribution if the employer is reimbursed for the entire payment. Am I right? If so, what is the proper way to address it?

It is perfectly permissible for an employer to say that your compensation package includes your benefits. Let's say your "total package" is $200,000.  So, if your  health insurance is $20,000 a year paid by the employer, the employer is going to set your W-2 compensation at a number that is reduced by that expense.  Likewise, other items might be included in the gross calculation but not in your "paycheck", like company car, continuing legal education, country club dues, etc etc etc.  

We have lots of legal and medical practices where the total compensation package approach is used (I teach my clients to use it!) for their more high paid individuals. And if one of those docs or lawyers is getting a company contribution into their 401(k) of 
$35,000 to maximize their 415 limit, that is $35,000 that is NOT paid to them in their W-2.  If they are not in the plan, then that $35k is in their paycheck.  Your 3% might be being treated in exactly that way, and there's nothing wrong with that so long as you don't have an employment contract that says otherwise (our clients' have employment contracts that explains that their total compensation package provided to them INCLUDES these specific items).  It appears they are doing a salary REDUCTION (not a salary deduction) and that's the way it would be handled.  If that is what they are doing, it is NOT a violation of any of the safe harbor provisions.  You are getting 3% of your (let's say) W-2 compensation allocated to the plan.  It's just that your W-2 is lower than it otherwise would be, and yes, you are effectively funding your own 3% contribution. 

We did the same thing many years ago (and still do with the 3% safe harbor) with regard to rank in file employees.  When the plan is established and we have to give employees 3%, we may tell employees that BECAUSE we are installing a plan where they will get 3% contributed, THIS YEAR we are forgoing our regular 3% raises to pay for the plan contribution, but only this year.  Next year we will be back to regular raises.  If you are clever enough to see the math here, you will recognize that the one year lack of salary increases actually pays for the 3% annual contribution FOREVER, not just the first year.  As I wrote and said when top heavy came in: "Congress says you have to give the employees 3%; it doesn't say YOU have to pay for it!" 

Queue the naysayers re: deemed coda, etc. But add one thing: in my neck of the woods of counsel are treated like independent contractors, which opens a whole new can of whup whatever.

30 minutes ago, Mike Preston said:

Queue the naysayers re: deemed coda, etc. But add one thing: in my neck of the woods of counsel are treated like independent contractors, which opens a whole new can of whup whatever.

Yeah, he said he was an employee, and put "of counsel" in quotes, so I went with him being an employee and talked about W-2s.  I assume if he wasn't getting W-2s but a 1099, he would respond accordingly and then we can string him up for that mess!

8 minutes ago, Larry Starr said:

Yeah, he said he was an employee, and put "of counsel" in quotes, so I went with him being an employee and talked about W-2s.  I assume if he wasn't getting W-2s but a 1099, he would respond accordingly and then we can string him up for that mess!

I was waiting to see if this was going to come up for conversation.....

17 hours ago, Larry Starr said:

It is perfectly permissible for an employer to say that your compensation package includes your benefits. Let's say your "total package" is $200,000.  So, if your  health insurance is $20,000 a year paid by the employer, the employer is going to set your W-2 compensation at a number that is reduced by that expense.  Likewise, other items might be included in the gross calculation but not in your "paycheck", like company car, continuing legal education, country club dues, etc etc etc.  

We have lots of legal and medical practices where the total compensation package approach is used (I teach my clients to use it!) for their more high paid individuals. And if one of those docs or lawyers is getting a company contribution into their 401(k) of 
$35,000 to maximize their 415 limit, that is $35,000 that is NOT paid to them in their W-2.  If they are not in the plan, then that $35k is in their paycheck.  Your 3% might be being treated in exactly that way, and there's nothing wrong with that so long as you don't have an employment contract that says otherwise (our clients' have employment contracts that explains that their total compensation package provided to them INCLUDES these specific items).  It appears they are doing a salary REDUCTION (not a salary deduction) and that's the way it would be handled.  If that is what they are doing, it is NOT a violation of any of the safe harbor provisions.  You are getting 3% of your (let's say) W-2 compensation allocated to the plan.  It's just that your W-2 is lower than it otherwise would be, and yes, you are effectively funding your own 3% contribution. 

I don't disagree with what you are saying, but I think it is a big "if" they are doing it as described.  I think it boils down to the employment agreement and how it defines compensation.  If it is unclear, the fact that the poster agreed to it might indicate that it is ok but that's above my pay grade.

Also interesting that $500 X 26 = $13,000.  More than 3% of maximum comp.  Curious Employee, what are your actual total employer contributions?  The fact pattern, plus the phrase "small law firm" has my radar up a bit that there might be other problems lurking.

Agree with Bird. If my pay is adjusted for the reduction and my reduced pay is now my pay, fine, but if I'm funding my own SH through an actual payroll withholding, I think that is a huge issue. And the math doesn't work either as you note. 

22 hours ago, Mike Preston said:

Queue the naysayers re: deemed coda, etc. But add one thing: in my neck of the woods of counsel are treated like independent contractors, which opens a whole new can of whup whatever.

The ABA has a handbook on "of counsel" relationships. Last edition I saw said they could be IC or employee, and there were ramifcations of either, mostly in the areas of professional responsibility (e..g., fee-splitting issues, malpractice liability). The simplest is employee. If were purely a tax issue,  easy to justify either status, but it's mostly not a tax issue.

1 hour ago, CuseFan said:

Agree with Bird. If my pay is adjusted for the reduction and my reduced pay is now my pay, fine, but if I'm funding my own SH through an actual payroll withholding, I think that is a huge issue. And the math doesn't work either as you note. 

I am not an employment lawyer, but (a) I don't think ERISA preempts the application of state wage & hour laws, here, (b) most states have restrictive rules on what can be deducted from an employee's wages, and (c) there is a difference between an employer's negotiating a lower salary because of the benefits it provides apart from salary, as contrasted with an employer's deducting things from an employee's salary, even with consent. I think Curious Employee, as a lawyer, should be able to analyze the state employment law issue, now that they know that is where his most significant issues lie, probably, as opposed to the qualified plan tax and ERISA rules. I'd be curious to know what they conclude.

5 hours ago, CuseFan said:

Agree with Bird. If my pay is adjusted for the reduction and my reduced pay is now my pay, fine, but if I'm funding my own SH through an actual payroll withholding, I think that is a huge issue. And the math doesn't work either as you note. 

Everyone: I gave him a scenario where what it appears might be happening would be perfectly ok.  Of course, for a lawyer. he wrote a lousy question without the details necessary to really answer his question.  HOW is the $500/week being recovered (did they REDUCE his salary or have a payroll deduction)?  Of course, if the latter, all the problems we all know about would apply. 

One would have thought he might have responded to my very detailed posting saying: "No, that's not what happened" and give us the details.  Maybe because what I proposed is EXACTLY what happened, we haven't heard back from him.

One of the reasons I hate "participants" (even bad lawyer participants) posting on this board and why I usually refrain from responding. Sometimes I just can't help myself...........

Larry.

Forgive me for not responding immediately. I posted yesterday and checked the forum now and didn't receive any notifications. And for those who think I should have included several more pages of information in my question and/or understood all the nuances of the law, I'm not a tax or ERISA lawyer or I wouldn't need to ask. To respond to a couple of questions, I am a W2 employee. Of counsel means different things to different firms. My employment agreement provides that I will be receive an agreed percentage of my receipts, plus health insurance and similar standard employee benefits. It does not provide for a "total package" salary or compensation figure. It does not reference any right to reduce said compensation to account for benefits. It does not reference contributions to my retirement account or the Profit Sharing Plan. When the managing shareholder (primary owner of the firm) learned he had to pay 3% to me as an employee to maintain the Safe Harbor status, he said I have to pay it back. So the $500 per check (semi-monthly not weekly) is reduced from my gross compensation before taxes and categorized as a "loan" payment. Without divulging my annual income, I can clarify that I am not saying that continues throughout the year, just until the "loan" reimbursing the Safe Harbor contribution is repaid. So, yes I am directly funding the employer contribution.

3 minutes ago, Curious Employee said:

Forgive me for not responding immediately. I posted yesterday and checked the forum now and didn't receive any notifications. And for those who think I should have included several more pages of information in my question and/or understood all the nuances of the law, I'm not a tax or ERISA lawyer or I wouldn't need to ask. To respond to a couple of questions, I am a W2 employee. Of counsel means different things to different firms. My employment agreement provides that I will be receive an agreed percentage of my receipts, plus health insurance and similar standard employee benefits. It does not provide for a "total package" salary or compensation figure. It does not reference any right to reduce said compensation to account for benefits. It does not reference contributions to my retirement account or the Profit Sharing Plan. When the managing shareholder (primary owner of the firm) learned he had to pay 3% to me as an employee to maintain the Safe Harbor status, he said I have to pay it back. So the $500 per check (semi-monthly not weekly) is reduced from my gross compensation before taxes and categorized as a "loan" payment. Without divulging my annual income, I can clarify that I am not saying that continues throughout the year, just until the "loan" reimbursing the Safe Harbor contribution is repaid. So, yes I am directly funding the employer contribution.

OK; now we have more info.  Please clarify: when you say your check is reduced, I take it the GROSS amount is smaller?  If that is the case, then my explanation of "compensation package" applies (just it wasn't explained to you in advance, just sprung on you).  OK: more than likely, if you are not getting your contracted amount under your employment agreement, you have a case against your employer.  HOWEVER, if he knew in advance you would cost him money for the plan, would he have said that comes out of your percentage of receipts?  Perhaps (probably?).  And what would you have done?  Agreed to it, because you were getting those funds directly into your fully vested retirement account?  Perhaps (probably?).  

What is your recourse? I assume you are actually an at will employee, so you can probably sue your employer and be looking for another job at the same time because it is not likely you'll be continued in the current one.  You've got to pick your battles.  

Since your GROSS is reduced before taxes, I don't think it matters one bit that it is called a "loan repayment"; that is just a handy way to describe it (but I like the "total compensation" concept better as it's easier to explain to highly paid employees) since it certainly is NOT a loan or a loan repayment.

Best of luck.

10 hours ago, Curious Employee said:

Forgive me for not responding immediately.

No worries.  You quickly learn that Larry is very knowledgeable but also crotchety at times.  

So, we can do math here, and we know that you are earning well above $120,000, which is the threshold for being a Highly Compensated Employee.  HCEs can be discriminated against, to the point of excluding them from a plan (or just excluding them from SH, although there may be reasons that doesn't work).  I think I'd turn this around and ask you - would you rather 1) just get your calculated salary based on whatever formula, and not be in the plan at all, or 2) have your salary reduced as it is now and have that money go into the plan?  The way they approached this is a little "off" but I think, bottom line, it is probably ok, especially since you apparently agreed to it.  I'm not in the habit of telling lawyers how to approach legal issues but it doesn't seem like it's worth it.

I will double down on my earlier analysis that if there is anything untoward here, it is under the wage and hour provisions of the labor and employment code of the state in which Curious Employee works.

Any employee that receives a unilateral reduction in pay because of a SHNEC that is most likely being done to benefit the owner should/would? be looking for a new job pronto.  IMHO.

Thanks all for the information. I think I understand where I stand. I am not looking to sue my employer. I am a big boy and can deal with it. I just wanted to know if it was per se inappropriate to handle it the way it's being handled.