electing not to receive an allocation

Employer has  a cross tested plan. Employees in their own rate group. In addition, outside of the plan, they award gifts to employees once they reach a  5 year milestone.

The employer wants to offer the gift or the profit sharing allocation. The employee chooses which one they want.   The plan would need to remove last day requirement since the employer will fund the profit sharing once them employee meets the 5 year mark.

Is this even acceptable?  Allowing the employee to decide if they want the contribution  or the gift?

Even if a number of rank in file select the gift over the contribution, the employer makes a 3% safe harbor  and this is sufficient to cover the gateway.

Just doesn't seem right.

Looking for reasons to tell the client to back away from this design.

If you give the employee the choice to receive the amount in cash, or have it contributed to the plan, that's a CODA.

9 minutes ago, C. B. Zeller said:

If you give the employee the choice to receive the amount in cash, or have it contributed to the plan, that's a CODA.

Not to mention a 5-year waiting period Which violates everything under the sun.

On 6/11/2021 at 3:11 PM, C. B. Zeller said:

that's a CODA

As in a disqualifying feature under Treas. Reg. 1.401(k)-1(a)(1), et seq.

On 6/11/2021 at 4:11 PM, C. B. Zeller said:

If you give the employee the choice to receive the amount in cash, or have it contributed to the plan, that's a CODA.

Employees would receive a gift ( not cash) or profit sharing allocation.  The amount of the profit sharing increases after the completion of 5 years. so if the employee had 10 years of service they receive $1000 profit sharing, at 15 years they receive $2,000.

By taking the gift, in lieu of the profit sharing, does the gift make this a CODA?

Is the gift reportable in income?

No gift. See IRC sec. 102(c).

10 hours ago, Luke Bailey said:

No gift. See IRC sec. 102(c).

Then it wouldn't be a CODA?

5 hours ago, BG5150 said:

Then it wouldn't be a CODA?

Yes. 1.401(k)-1(a)(3)(i) includes in the definition of a qualified cash or deferred election, an election to have the employer provide cash "or some other taxable benefit" versus a plan contribution.

I'm sort of curious what this "gift" is exactly, if not cash. I'm trying to imagine what sort of gift I would want my employer giving me. A gold watch? A trip to Hawaii?

That's why I asked if it was reportable in income.

15 hours ago, BG5150 said:

Then it wouldn't be a CODA?

My statement was perhaps cryptically brief, BG5150. What I meant was that what they're calling a "gift" would never be treated as a gift by IRS. It would be compensation no matter what form it took (cash, trip to Disneyland, car, Bitcoin). That's what IRC sec. 102(c) says, i.e., you can't have gifts in compensatory context. Right in the Code.

In this example, wouldn't it be permissible to give the employees their "gift" (sounds like a bonus) and then the employees could decide if they want to contribute any portion of it to the 401k plan (assuming the plan allows for separate election on bonuses).

This way the employee has the option to decide if he wants cash or plan contribution, so you get to the result the employer is wanting.

The only issue would be in the case where the employee is already at his 402(g) limit and can't contribute any more to the plan.

the plan is safe harbor so 401k testing is not an issue.

4 hours ago, ACK said:

In this example, wouldn't it be permissible to give the employees their "gift" (sounds like a bonus) and then the employees could decide if they want to contribute any portion of it to the 401k plan (assuming the plan allows for separate election on bonuses).

Yes.

4 hours ago, ACK said:

The only issue would be in the case where the employee is already at his 402(g) limit and can't contribute any more to the plan.

Yes.