401k match [company withholding income to offset company match]

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Monroechompers
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401k match [company withholding income to offset company match]

Post by Monroechompers » Tue Aug 22, 2017 9:23 am

Wondering how this situation would be viewed by the irs.....I was eligible to contribute to my employer's 401k last year and fully funded. They offer a safe harbor match and profit sharing contribution. Last week I am told that they will be withholding these amounts from my pretax income to reimburse themselves for their contribution to my 401k account. I did not know about this in advance though they referred me to a statement in my employment contract that says "net collections will be reduced by pension plan contributions." Of course I thought this referred to my elective deferrals. They will reimburse themselves x amount for the safe harbor match and x amount for the profit sharing contribution. I am wondering if anyone has heard of these before. Essentially they are "working around" the individual max by filtering it through the company. I have many issues related to this whole situation but my first is how this would be viewed by the irs during an audit.
Thoughts. Thank you!

Dottie57
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Re: 401k match [company withholding income to offset company match]

Post by Dottie57 » Tue Aug 22, 2017 9:53 am

Monroechompers wrote:
Tue Aug 22, 2017 9:23 am
Wondering how this situation would be viewed by the irs.....I was eligible to contribute to my employer's 401k last year and fully funded. They offer a safe harbor match and profit sharing contribution. Last week I am told that they will be withholding these amounts from my pretax income to reimburse themselves for their contribution to my 401k account. I did not know about this in advance though they referred me to a statement in my employment contract that says "net collections will be reduced by pension plan contributions." Of course I thought this referred to my elective deferrals. They will reimburse themselves x amount for the safe harbor match and x amount for the profit sharing contribution. I am wondering if anyone has heard of these before. Essentially they are "working around" the individual max by filtering it through the company. I have many issues related to this whole situation but my first is how this would be viewed by the irs during an audit.
Thoughts. Thank you!

Does not sound kosher. I am not sure which government agency to call, but probably the one that certifies safe harbor money. Safe harbor allows companies allow HCE to contribute to the max amount without testing. I think the company will be in serious trouble.

Check here https://www.irs.gov/retirement-plans/pl ... n-overview

ETA. Call the IRS.

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neurosphere
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Re: 401k match [company withholding income to offset company match]

Post by neurosphere » Tue Aug 22, 2017 10:02 am

I'm not sure I understand what's happening with your 401k, but here is my guess.

It seems that your profit sharing contribution is being reduced by some amount. You contributed to the 401k, and you got the match which qualifies the plan as a 'safe harbor' plan. But profit sharing is optional, and the amount can be decided by management. It seems that they reserve the right to reduce your profit sharing component by some amount which is related to your and/or everyone else's match.

Alternately, it may be that some amount of operating costs for the 401k comes out of everyone's profit sharing?
-- Real name: Sotirios Keros. If you have to ask "Is a Target Retirement fund right for me?", the answer is yes.

Monroechompers
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Re: 401k match [company withholding income to offset company match]

Post by Monroechompers » Tue Aug 22, 2017 10:53 am

Here is what has happened. I contributed 18k to my 401k in 2016. Expecting to be getting safe harbor match and profit sharing contribution as detailed in our employee summary description plan that I was provided. I got an email last week saying my employer is about to put in their safe harbor contribution and the profit sharing amount they have elected. (apparently they have 9.5 mo after year end to do this). They go on to say that they will be reducing my take home income by this amount (the amount they are putting in) to reimburse themselves for what they are putting in on my behalf. I am a highly compensated employee. An employed physician. Not a partner.

teen persuasion
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Re: 401k match [company withholding income to offset company match]

Post by teen persuasion » Tue Aug 22, 2017 11:29 am

So they are taking credit for contributions, but making you pay for them?

Monroechompers
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Re: 401k match [company withholding income to offset company match]

Post by Monroechompers » Tue Aug 22, 2017 11:34 am

Yup. That is what is happening.

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neurosphere
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Re: 401k match [company withholding income to offset company match]

Post by neurosphere » Tue Aug 22, 2017 12:41 pm

Monroechompers wrote:
Tue Aug 22, 2017 11:34 am
Yup. That is what is happening.
How much was your match? How much was your profit sharing? How much are they keeping from your pay?

I'm wondering if this is a legal way to have a safe-harbor plan (which seems to be more convenient and cheaper to maintain compared to a plan which requires compliance testing or whatever the terms is), but which is still ultimately paid for by the HCE's while still preserving the benefits for the non-HCE's. Just a guess.

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neurosphere
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Re: 401k match [company withholding income to offset company match]

Post by neurosphere » Tue Aug 22, 2017 12:46 pm

Also, there is a $53,000 limit (or thereabouts) on the total 401k contributions employee+match+profit sharing+other per employer. Is it possible that one or more of those components put you over the limit for 2016?

Is there a 457 plan involved? Off the top of my head, I don't know if 457 contributions are included in the $53,000 limit or not. That's easy to look up, but I don't feel like it right now. :D

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8foot7
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Re: 401k match [company withholding income to offset company match]

Post by 8foot7 » Tue Aug 22, 2017 1:19 pm

This doesn't pass the smell test. It's not really profit sharing if they share with one hand and take back an equal amount with the other. Has anything actually happened? I might reach out to the plan administrator to determine if this is kosher, or the dept of labor.

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neurosphere
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Re: 401k match [company withholding income to offset company match]

Post by neurosphere » Tue Aug 22, 2017 2:14 pm

Monroechompers wrote:
Tue Aug 22, 2017 9:23 am
Essentially they are "working around" the individual max by filtering it through the company. I have many issues related to this whole situation but my first is how this would be viewed by the irs during an audit.
I'm not sure what you mean by "working around the individual max". Which max?

Also, just in case it's not clear to everyone, a safe harbor plan does not require employer contributions to non-HCE employees, but does require a minimum match (or fixed contribution) for to non-HCE accounts.

Monroechompers
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Re: 401k match [company withholding income to offset company match]

Post by Monroechompers » Tue Aug 22, 2017 2:43 pm

I am referring to my employee max allowed contribution of 18k.

Monroechompers
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Re: 401k match [company withholding income to offset company match]

Post by Monroechompers » Tue Aug 22, 2017 2:50 pm

That is what I am wondering....is this legal? If so than I am ok with it. It just seems I would be able to find someone who has heard of this if this was a legit thing to do. I have asked many other employed physicians, office manager for large practices, parners in large practices, a cfo that rns a large company retirement plan, and a tax attorney off the record. I am fine to reimburse for this and have more tax advantages space than less occupied just wondering if I would have any issue in an audit of any sort.

ERISA Stone
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Re: 401k match [company withholding income to offset company match]

Post by ERISA Stone » Tue Aug 22, 2017 3:36 pm

What does your plan document say about plan compensation for contribution purposes? It supersedes your employment contract. I can't say for sure it's illegal, but it feels incredibly unethical. If you are a W-2 employee (nonpartner), I just don't see how they could do this. As it was alluded to, they are either trying to go around the 402(g) limit ($18k), or trying to avoid paying employer contributions from employer funds (this is my guess. You are less likely to take advantage of something like a SH contribution if you're funding it yourself).

Here's the only benefitslink article I can find that is similar. Note that it's from 18 years ago, so a lot has changed. https://benefitslink.com/boards/index.p ... tribution/

The best argument this thread made is:
Basically, what you will be participating in is a profit sharing plan with a CODA or cash or deferred arrangement (in other words a 401(k) plan). Under such an arrangement, you can elect to either (i) receive your entire salary in cash, or (ii) defer a portion of your salary. If you defer a portion of your annual salary, your employer will contribute your "elective deferral" to the plan.
Please tell me there isn't a vesting schedule attached to the profit sharing/match, other than immediate 100% vesting.

ERISA Stone
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Re: 401k match [company withholding income to offset company match]

Post by ERISA Stone » Tue Aug 22, 2017 3:38 pm

neurosphere wrote:
Tue Aug 22, 2017 2:14 pm


I'm not sure what you mean by "working around the individual max". Which max?

The max is $18k. If they're reducing his compensation by more than $18k and classifying as an employer contribution, they are in effect creating a workaround of the $18k limit.

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Re: 401k match [company withholding income to offset company match]

Post by ERISA Stone » Tue Aug 22, 2017 3:39 pm

Monroechompers wrote:
Tue Aug 22, 2017 2:50 pm
I have asked many other employed physicians, office manager for large practices, parners in large practices, a cfo that rns a large company retirement plan, and a tax attorney off the record.
What's the consensus from this group?

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neurosphere
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Re: 401k match [company withholding income to offset company match]

Post by neurosphere » Tue Aug 22, 2017 3:48 pm

Ah, I think I was confused about what was going on, and now I understand. I was confused with the term "reimburse".

Is the summary essentially that your "profit sharing" contribution from the employer basically is coming out of your paycheck, and is not costing the employer any "profits"?

I know two other physicians, not partners, who had a similar arrangement. In essence, they could elect to receive bonus/productivity income as regular pay, or designate a portion of it to go into the employer plan, in addition to the $18,000 limit. Although, in both cases I know, the employer was a university or similar non-profit.

ERISA Stone
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Re: 401k match [company withholding income to offset company match]

Post by ERISA Stone » Tue Aug 22, 2017 3:53 pm

neurosphere wrote:
Tue Aug 22, 2017 3:48 pm

Although, in both cases I know, the employer was a university or similar non-profit.
This is not my area of expertise but I think your last line is important. I found this information about 414 plans when researching this issue.

https://www.irs.gov/government-entities ... efit-plans

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Re: 401k match [company withholding income to offset company match]

Post by Spirit Rider » Tue Aug 22, 2017 5:49 pm

This starting to jog some dormant memory cells. This is not an uncommon feature of certain physician profit sharing plans with deferrals.

It essentially allows physicians to to have greater contributions, because technically the additional contributions are being made by the employer. However they then reduce the participant's income.

I'm not sure, but these might not really be a match, but a non-elective employer contribution to meet the safe harbor.

I am pretty sure this is allowed by IRS regulations. What I think might be happening is your employer failing to communicate.

Monroechompers
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Re: 401k match [company withholding income to offset company match]

Post by Monroechompers » Tue Aug 22, 2017 6:06 pm

Ok maybe that makes sense if that is an ok thing to do. However should there be some official document that details that? Because what I have is a summary plan describing safe harbor match and profit sharing contribution. The same thing given to every employee. No mention of special employees or circumstances or anything.

ERISA Stone
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Re: 401k match [company withholding income to offset company match]

Post by ERISA Stone » Mon Aug 28, 2017 12:17 pm

I posted your situation on benefitslink. I only received a few responses but all made mention of allowing the participant to have discretion is likely a CODA arrangement. They were ok with the profit sharing aspect, and I read that they would be ok with a safe harbor nonelective since it is a clearly defined amount. However, the matching aspect, in their opinions, may create a CODA arrangement. Here are the separate responses I received:
That would be more of an employment agreement issue. It is common for physicians in a group to be charged with all expenses related to their benefits package. I've had the same concern that this may in fact make an otherwise employer contribution into a CODA with the inherent problems that flow from that, but I think if the employment agreement is appropriately written (BY AN ATTORNEY WHO KNOWS WHAT THEY ARE DOING), the employee/physicians "compensation" can be defined to be x minus y, where y is the costs associated with the benefits attributable to them. When too much "choice" is given to the physician is when you run into trouble (i.e. if the physician can "decline" a profit sharing contribution - then to me it looks like a CODA, smells like a CODA, and walks like a CODA ...).
You can, as part of an employment agreement which defines the total compensation package, provide that a person's base pay is permanently reduced by X amount which will be contributed as an employer contribution on the employee's behalf. Like plans that require employees to contribute as a condition of employment - the amounts do not count as deferrals.

However, providing annual discretion - which if you do with matching contributions that indirectly provides discretion - then I think you have a CODA instead. Unless with a match the maximum is assumed and "charged" whether he gets it or not.

Much easier to defend at the start of employment (or plan) - the total compensation package is X and it is comprised of base pay A, retirement plan contributions B and H&W benefits C plus whatever incentive pay is earned. If there's a waiting period then define up front these components before and after, because doing it only when the person becomes eligible looks more CODA again.

Of course, if someone takes a lower comp because of these "employer provided" contributions that are subject to a vesting schedule - that's another complication.

In summary: defining the total compensation package by component in employment agreement at employment commencement - good - reducing a participant's pay arbitrarily to pay for his matching contributions - bad.
The match in such a situation is clearly a disguised CODA. They're trying to get the benefit of 402(g)(8) without making the individual a K-1 partner. 402(g)(8) does not apply to W-2 employees. Nonelective is OK, if truly uniform/nonelective, because then the employee has no choice between contribution vs. taxable cash. However, would need to be disclosed up front so as to be part of employment contract, otherwise employee can complain underpaid.
https://benefitslink.com/boards/index.p ... pensation/

The reality is if you're ok with it, I probably wouldn't rock the boat with your employer.

Neffles
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Re: 401k match [company withholding income to offset company match]

Post by Neffles » Mon Aug 28, 2017 12:49 pm

If I am understanding it correctly, it looks like they are giving you the funds in the tax-deferred rather than paying it to you as taxable income which allows you greater tax deferrals and saves them payroll taxes as well. The language used seems confusing so I may not be right here, especially use of reimbursing themselves.

Essentially it looks to me like in the simplest way:
"We owe you $X as profit sharing/matching, and rather than pay it as taxable income, we are paying it to you as tax-deferred(AKA withheld/reduced income."

Monroechompers
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Re: 401k match [company withholding income to offset company match]

Post by Monroechompers » Mon Aug 28, 2017 12:54 pm

Thanks again for all the comments.
And thank you ERISA Stone for posting elsewhere as well.
A lot of these issues are over my head, but I am trying....
I want to understand these issues.
I spoke to my employer this week, who clearly also does not understand the arrangement.
Plan is to speak further, along with the practice attorney, and hopefully get a better understanding.
I have explained that I am not upset, but I plan to work with the group for the foreseeable future and want to understand these benefits. I thought it was black and white based on my contract and summary plan description. I am going to make them work a bit to explain where the rest of this is coming from. I will post update when I have more.
Again, thanks all!

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