Refusal to make a PS contribution by a division of an ER

Good morning to all,

A client, which happens to be an Indian reservation, has a commercial entity that sponsors an ERISA covered 401(k) plan.  That commercial entity has no HCEs.  The employer decides that overall for 2017, it will contribute 5% as a profit sharing contribution for the year. Per the plan document, profit sharing is totally discretionary and is supposed to be allocated on a salary ratio basis.  However, each division within the company is responsible for being a profit center and one division says it doesn't have the resources to make any contributions for 2017.  This means that about 2/3 of the employees get a 5% of pay contribution and 1/3 of the employees get nothing.

Again, there are no HCEs.  Top Heavy status is not an issue.  Passing 410(b) coverage testing is not an issue.  

Does anyone see any problem with this?  Is it permissible for the 1/3 to get nothing in profit sharing for the year?

Your thoughts and suggestions are always appreciated!  Thank you.

RTFD!

Good Luck!

As always Read The Document. Does the document allow each division to get a different rate of contribution?

If so you will pass testing, if not you are probably violating the terms of the plan document.

Of course I read the document.  It does not have anything to say about divisions at all.  

We all work in a world that is driven by non-discrimination tests.  We are so programmed to be on the alert for anything that might violate them, we or at least I, don't know how to think about a plan that is not plagued by non-discrimination issues.

I merely wanted to know if anyone else had run into a similar situation.  It had occurred to me that the way the document is written, it would seem that all participants were supposed to be treated alike.  There is no mention whatsoever of anything being done differently by divisions.

Our gut reaction here is to say to the client "No, you can't do this" but we wanted to be sure we were on solid ground.  Since we couldn't tie our reasoning to anything to do with non-discrimination testing, we just thought we'd run it up the flag pole and see what others had to say.

If the document says that the profit sharing contribution is allocated to participants in a certain way regardless of what division they work for, then that's what must be done.  If one division "contributes" (and I use that word loosely) zero, then that merely reduces the contribution but the employees of that division still get their allocable share of the contribution.  Whether or not it is too late in the current plan year to amend the  plan to accommodate the client's goals for the current plan year is a separate issue which it and you may wish to consider.  Certainly it could be amended for future plan years.        

You would be on solid ground telling the client that the terms of the plan document are not being followed.  Prorata would indicate all eligible participants taking into consideration allocation requirements if there are any.

And chances are it is a large plan and audited.... auditors shouldn't let that get through the process.

You're going to have to have the dreaded phone call.

BTW... no HCEs in the commercial plan?  I believe you, just surprised.   I worked with a reservation in a previous life.  They had one ERISA plan and one non-ERISA plan.  Pretty straight forward, but non-ERISA plan was a little more interesting.

@jpod Thank you very much for your considerate reply.  That makes sense.  We are going to tell the client that they cannot omit anybody for 2016, 2017 and 2018, but that for 2019 forward, their plan can be amended to specify that different divisions may contribute varying amounts.  Their document is attorney drafted so it will be between her and them to draft whatever language they want.

You understand that rate group testing will need to be done?  Maybe I'm wrong about that because no HCE....

If your 2/3 and 1/3 scenario is close, they may not pass coverage.

@Mr. Bagwell, thanks for your considerate reply as well!  Interesting - this tribe also has a non-ERISA plan as well as an ERISA plan.  It's not my plan, personally, so I don't know all the details.  I was just asked to do the research on the question without much to go on besides a hurried description of what they wished to do.

Actually two of my co-workers are going to deliver the news in person, that anyone omitted and carried as a receivable to the plan (by us) for 2016 and 2017 has to be funded, that it's too late for 2018, but that for 2019 they can amend the plan.

As for no HCEs, since it's not my plan, I can't be 100% sure.  That's just what I was told.  The plan has well under 100 participants so no auditor has been involved.

2 hours ago, Mr Bagwell said:

You understand that rate group testing will need to be done?  Maybe I'm wrong about that because no HCE....

If your 2/3 and 1/3 scenario is close, they may not pass coverage.

You can't fail testing if there are no HCE's.  In a DC plan, with no HCEs, you could have each participant in their own group and only contribute for one person and you would be fine.

2 hours ago, jpod said:

If the document says that the profit sharing contribution is allocated to participants in a certain way regardless of what division they work for, then that's what must be done.  If one division "contributes" (and I use that word loosely) zero, then that merely reduces the contribution but the employees of that division still get their allocable share of the contribution.  Whether or not it is too late in the current plan year to amend the  plan to accommodate the client's goals for the current plan year is a separate issue which it and you may wish to consider.  Certainly it could be amended for future plan years.        

Well said; nothing more to add.  100% agreement.

2 hours ago, Mr Bagwell said:

You would be on solid ground telling the client that the terms of the plan document are not being followed.  Prorata would indicate all eligible participants taking into consideration allocation requirements if there are any.

And chances are it is a large plan and audited.... auditors shouldn't let that get through the process.

You're going to have to have the dreaded phone call.

BTW... no HCEs in the commercial plan?  I believe you, just surprised.   I worked with a reservation in a previous life.  They had one ERISA plan and one non-ERISA plan.  Pretty straight forward, but non-ERISA plan was a little more interesting.

IF the administrator was to allocate nothing to that division's employees, THEN the terms of the plan would not be being followed.  As long at the PA explains that the allocation of the actual contribution will be made across ALL the employees (regardless of what division they are from), then the plan is fine.

1 minute ago, Larry Starr said:

IF the administrator was to allocate nothing to that division's employees, THEN the terms of the plan would not be being followed.  As long at the PA explains that the allocation of the actual contribution will be made across ALL the employees (regardless of what division they are from), then the plan is fine.

Yep, I'm with you on that. 

1 hour ago, ldr said:

that anyone omitted and carried as a receivable to the plan (by us) for 2016 and 2017 has to be funded

Kind of implies that they have been omitting employees.  Yikes.

2 hours ago, ldr said:

@jpod Thank you very much for your considerate reply.  That makes sense.  We are going to tell the client that they cannot omit anybody for 2016, 2017 and 2018, but that for 2019 forward, their plan can be amended to specify that different divisions may contribute varying amounts.  Their document is attorney drafted so it will be between her and them to draft whatever language they want.

From your original question, it appeared that this was the first time it came up and you (rightfully) are challenging it.  What is this about 2016?  We would assume that you are talking about 2017 allocation at this time.  If the 2016 allocations were  done incorrectly, the PA needs to go back and correct them.

@ Larry Starr and Mr. Bagwell,

From what I have understood from my colleagues who do work on this plan, it was started in 2016.  The employer set a certain % of pay - I think 5% in all years - that they wanted the participants to receive and they funded it on a payroll by payroll basis.  This is not in the document at all.  The document calls for a totally discretionary contribution allocated on a pro-rata basis.  

In 2016 they simply didn't give anything to a few participants with no explanation as to why.  We booked a receivable contribution for those participants at the same rate the others got and told the client they owed these contributions.  Whether they funded them or not, I do not know.

For 2017 they did the same thing, but this time it was more than just a few people, and the excuse given was that the "division" they work for doesn't have any money and doesn't want to pay the contribution.  So as I type this, my colleagues are delivering the news as described above that they do have to pay the contributions in arrears for 2016 and 2017, they do have to treat everyone equally for 2018, and that for 2019 they can amend the plan to describe a variation in contribution levels by division, on the assumption that they will continue to have only NHCE employees in the plan.

ldr,

Thanks for the explanation.  I understand more now.

The payroll by payroll would be an acceptable way to pay the discretionary profit sharing.  It's not a check box for the AA agreement, but some employers do once a year funding, some do by payroll, and then maybe quarterly.

@ Mr. Bagwell, yes, I believe all of our other clients who fund a discretionary profit sharing contribution do it after the end of the plan year.   We are normally asked to calculate it for them.  This situation is highly unusual but of course there's nothing wrong with it - as you said, they can choose how they wish to make the deposits.  They just can't choose to leave eligible participants out of it altogether!

I have a few Clients that fund Profit Sharing throughout the Plan Year. However, we always perform a true-up/true-down when we receive the annual census. 

On 9/5/2018 at 10:30 PM, ldr said:

@ Larry Starr and Mr. Bagwell,

From what I have understood from my colleagues who do work on this plan, it was started in 2016.  The employer set a certain % of pay - I think 5% in all years - that they wanted the participants to receive and they funded it on a payroll by payroll basis.  This is not in the document at all.  The document calls for a totally discretionary contribution allocated on a pro-rata basis.  

In 2016 they simply didn't give anything to a few participants with no explanation as to why.  We booked a receivable contribution for those participants at the same rate the others got and told the client they owed these contributions.  Whether they funded them or not, I do not know.

For 2017 they did the same thing, but this time it was more than just a few people, and the excuse given was that the "division" they work for doesn't have any money and doesn't want to pay the contribution.  So as I type this, my colleagues are delivering the news as described above that they do have to pay the contributions in arrears for 2016 and 2017, they do have to treat everyone equally for 2018, and that for 2019 they can amend the plan to describe a variation in contribution levels by division, on the assumption that they will continue to have only NHCE employees in the plan.

I'm not sure what service you provide if you don't know if they made the 2016 contribution. What did you show on the 5500?  Seems to me there are some internal problems with your colleagues making decisions about admin that they do not appear qualified to make and either misleading the client or just making error by omission  I would be concerned.

IF they are doing the same thing for 2017 that they did for 2016, it appears that they clearly did not do it right in 2016.  IT NEEDS TO BE FIXED if the dollars were not allocated correctly.  If they put the money in, fine.  If not, you need to reallocate what was put in for 2016 to reduce the overall contribution as a percentage to each participant, including the ones they decided to just leave out.]

SInce this could not happen in our operation, I have to admit I just am not clear on what you do and how you do ti. That 5500 for 2016 bothers me a lot..