“I am clear about automatic enrollment but was wondering if you could provide a little bit of additional clarification about how mandatory contributions would work in actual operation. Specifically, I have the following questions:
(1) Are mandatory contributions reported on the W-2 as employer contributions (voluntarily reported, if at all)?
(2) If mandatory contributions are added to an existing plan can they only be added as a condition of participation for newly eligible employees or, alternatively, as a condition of employment for all employees? It seems like the election for participation has to be at initial eligibility to participate; existing eligible employees would have missed that chance so adding as a condition of employment would be the only way to add for all employees.”
Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:
Yes, mandatory contributions can be difficult to administer in actual plan operation since the guidance is somewhat limited. To answer your first question, the IRS W-2 Instructions state such deferrals may be reported, but they should NOT be reported in the typical location of Box 12 of the W-2, as such contributions would then be counted against the 402(g) elective deferral limit. Instead, required employee contributions can be reported in Box 14. This box, labeled the “Other” box on the form, is for contributions that do not fit in a box elsewhere on the form. We have seen some organizations label these contributions so it is clear to the employee as to the identity of same, (e.g. with the code “M403B” signifying 403(b) mandatory contributions) but such labeling does not appear to be required.
Also, as a reminder from our prior Q&A such mandatory contributions, though not subject to federal income taxation, are indeed subject to taxation as wages for FICA purposes. Thus, the employee mandatory contribution should be included in Box 3 (Social Security wages) and Box 5 (Medicare wages and tips).
As for whether the only method of adding a mandatory provision to an existing plan would be as a condition of employment, there is nothing in the guidance that would indicate that the provision could not be added for individuals employed after a certain date. Thus, it is theoretically possible that employees hired after 1/1/2014, for example, will be given a one-time irrevocable election of whether or not to participate in the plan upon hire, without requiring a mandatory contribution for existing employees.
However, there are significant disadvantages to this scenario, as follows:
1) Mandatory contributions are considered to be employer contributions for testing purposes, so employees who, as a practical matter, have the same employer contribution may have different levels of employer contributions for nondiscrimination testing purposes, thus complicating testing; and
2) If the mandatory contribution one-time election is only permitted for new hires, while other existing employees are not given such an election, this may be a benefit, right or feature that may need to be tested separately for nondiscrimination testing.
Thus, implementing a mandatory contribution as a condition of employment, as you describe, would be far less problematic from a testing perspective.
Finally, we should also note that this guidance, along with that of our prior Q&A, assumes that the plans in question are Employee Retirement Income Security Act (ERISA) plans. For church or governmental plans, the plan sponsor would also need to confirm that a mandatory contribution would not run afoul of state payroll deduction laws prior to implementation.
The Experts thank you for your interest in the column and for your follow-up questions!
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.