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My company is being told by our legal counsel that we have to make our employer 401k match amount an "above the line" corporate expense in order to avoid the chance that the IRS might find our retirement plan "non-compliant" in an audit. Our current plan, has a 3% safe harbor, and a 200% employer match. So, for simplicity sake, let's say my company has 2 employees. For employee A making 280K: safe harbor of $8,100 + salary deferral $14,966.67 + employer match $29,933.33 = total 401k of 53K. For employee B making 280K: safe harbor of $8,100 + salary deferral $0 + employer match $0 = total 401k of 8.1K. Employee A's W2 gross wages is 280K - 53K = 227K. Employee B's W2 gross wages is 280K - 8.1K = 271.9K. Our legal counsel is saying that if audited, our plan would be thrown out because the W2 wages varies too much and each employee is able to manipulate his/her W2 too much.
What he proposes is for us to change our retirement plan so the following occurs: For employee A making 280K: safe harbor of $8,100 + salary deferral $14,966.67 + employer match $29,933.33 = total 401k of 53K. For employee B making 280K: safe harbor of $8,100 + salary deferral $0 + employer match $0 = total 401k of 8.1K. However, now we establish a "pool" for the employer match as an "above the line" corporate expense, so we require both employee A and B to contribute $14,966.66 to the employer match pool. Employee A gets 100% of that pool whereas employee B gets 0% of that pool. Employee A's W2 gross wages are now 280,000 + 14,966.66 - 53,000 = 241,966.66. Employee B's W2 gross wages are now 280,000 - 14,966.66 - 8,100 = 256,933.34.
Is this sound legal advice? Seems very unfair to employee B. Will force employee B to max out their salary deferral so that they don't lose out and end up giving money to employee A. Seems like we need to get a second opinion from another lawyer.
What he proposes is for us to change our retirement plan so the following occurs: For employee A making 280K: safe harbor of $8,100 + salary deferral $14,966.67 + employer match $29,933.33 = total 401k of 53K. For employee B making 280K: safe harbor of $8,100 + salary deferral $0 + employer match $0 = total 401k of 8.1K. However, now we establish a "pool" for the employer match as an "above the line" corporate expense, so we require both employee A and B to contribute $14,966.66 to the employer match pool. Employee A gets 100% of that pool whereas employee B gets 0% of that pool. Employee A's W2 gross wages are now 280,000 + 14,966.66 - 53,000 = 241,966.66. Employee B's W2 gross wages are now 280,000 - 14,966.66 - 8,100 = 256,933.34.
Is this sound legal advice? Seems very unfair to employee B. Will force employee B to max out their salary deferral so that they don't lose out and end up giving money to employee A. Seems like we need to get a second opinion from another lawyer.
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