If you have a Safe Harbor 401(k) Plan or pretty much any 403(b) Plan, then you can skip this entire discussion. Wow, that is like being let out for recess early - always a great thing! However, if you have received a communication from us telling you that you must refund some of the salary deferrals of your top people, then you probably want to read on. Okay, you probably don't really want to read on having a million other things you need to do, but you should anyway.
Come with me on an adventure back in time....... It is the early 1980's and 401(k)'s have just been created. Plan Design Consultants, Inc. has only been around for a few years at this time having been founded in 1975 by the man now affectionately referred to by our staff as "the old gray hair". Well, okay, maybe "affectionately" is not the applicable word for some of our staff. Anyway, back to our exciting story of mystery and intrigue.
Somewhere in the dark depths our our Nation's Capital, picture a couple of young recent graduates of Georgeton Law School are slaving away deep into the night on drafting proposed legislation (yes, I know it is really spelled Georgetown Law School, but, hey, this is a fictional story). They are anxious to impress the Congressman that was crazy enough to hire them. Picture Kevin Spacey of the Netflix TV Series, House of Cards - a tough task master, as you know. They have been up for two days with the help of the best illegal stimulants money can buy and this point they approaching paranoia and hearing voices from somewhere in their head. New legislative analyst #1 says to #2 - "We have just this one night to come up with some rules for 401(k) plans that will drive Plan Sponsors crazy for many, many years to come. These rules need to be incomprehensible, stupid, and most of all designed to make sure that the most successful people have a hard time retiring in style. Give me your best thoughts!"
Analyst #2 says "How about this, let's start by creating two classifications of people. The bottom classification will be able to save pretty much as they want without any restrictions. We can call them the "Non-Highly Compensated Employees". Let's call the top classification of employees the Highly Compensated Employees and let's really stick it to them with the rules and let's not forget to stick it to their family members as well. You know.... their spouses, their kids, their parents and certainly anyone owning more than 5% of the company.
Analyst #1 says "Dude, you are on a roll - take another puff and keep going!" To which Analyst #2 says "Wouldn't it be really perverse to come up with some crazy mathematical rule, like the top group cannot do salary deferrals on the average that are more than two percentage points than the average of the bottom group. For example, if the bottom group averages 2% of pay, then the top group would be limited to an average of 4% of their pay. Consider how genius that would be because the bottom group cannot afford to do hardly anything and therefore the top group will really be hampered." The Congressman will be so impressed. With these kinds of rules we can make sure people have to pay current income taxes.
"Yes, yes, yes..... you are really onto something terrific here! I knew there was a reason you graduated at the top of our class. If those top people have done too much under your two percent rule, let's make them take the money back out and, check out this.... let's apply a 10% excise tax on the company if they can't get this money returned within 2 1/2 months of the end of the year. That will really drive them bonkers - we can upset the top people, we can upset the company and we can make them "want to shoot the messenger" who would be the TPA firm doing these calculations."
"Beautiful, awesome, outrageous, most excellent - our legislative careers will skyrocket when Congress sees the superb work we have done on this. Give me another drag on that magic cigarette, will you? My only fear is that those legislative analysts who joined the staff of that honest, hardworking, intelligent Congressman from Kansas will create some sort of a Safe Harbor exception to our testing. They are such bleeding hearts that they will probably come up with some rule that says you can ignore our testing if you are willing to do a certain size match or Profit Sharing contribution. If the employer will agree to do this, they might even specify that the top group can do whatever the salary deferral limit is for the year. I heard they might let people put away $17,500 or even $23,000 if they are old geezers (over 50 by the last day of the year).
And with their work done for the night, the young grads headed of to Foggy Bottom to seek more wisdom in the realm of Budweiser (no wait, it would have to be some IPA Craft Beer that cost $2 a bottle more than domestic beer - can't be saving that money for retirement you know) - and in the morning they can go for a Caramel Creme Crunch Frappuccino with Expresso Infused Whipped Creme and Italian Roast Coffee Drizzle. Hey, what's $6.75 for a coffee when you are not saving for the future anyway.
