Anyone know anything about the law of pensions/401k/etc

Factual Questions
1

Lets say I have a friend. This friend works in a law firm as an associate. The law firm has a pension plan (% of income) and a 401k match program. Apparently, they take your 401K elections and invest the 401K match and the pension in exactly the same way. The 401K match and pension do not vest for 5 years.

For the secretaries and other staff, the plan is kosher and works how you would think it should. However, for the associates and partners, the plans are not exactly what they appear to be.

The attorneys are paid on a percentage basis. However, the attorneys need to pay for their own 401K match and pension. As an example, lets say an attorney billed $30,000 one month. Lets say the attorney’s cut of that is 50%. The attorney, however, will not get a pay stub indicating his gross for the month is $15,000. Instead the attorney will get a pay stub indicating his gross is $15,000 less the monthly 401K match (lets say $420) and less the pension plan based off the $15,000 (lets say ($1710), or $12,870. It is the $12,870 that is used for gross pay for tax purposes, social security, etc.

Right off the bat, I note that they are inconsistent in their application of the pension plan – for staff, it is X% of their gross pay. For attorneys, it is X% of some number greater than the gross. This is probably due to poor algebraic skills. If my math is correct, in the above example they are “contributing” $132 over and above what they should be to the pension plan. The precise formula (I believe) is
pension overpay = (pension %) [(billing)(commission %) - (401k match)]/[(1- (pension %)].

If an attorney leaves within 5 years (the time to fully vest), the firm will cut them a check for any unvested portion of the 401K and pension plan.

Okay, so lets assume this information is disclosed to the associate when he was recruited. (This happens to be a false assumption – the associate was led to believe his commission was Y% and the firm provided a 401K match and a pension plan, which is clearly not the case. However, this would be resolved with a private cause of action in fraud).

First, what is the status of the pension overpay? Can someone, at some future date, retroactively say “oops” and remove that money from your pension?

Second, how safe is the pension? Once it vests, is owned by the associate, even if the firm dissolves? In the above plan, if you max out your 401K savings, then you might actually be putting away, say 25% of your income for retirement per year. If my “friend” wanted to actually have access to most of that money now, he would need to drop his 401K to zero so that there was no 401K match being taken out of his commission, and the only money going into his retirement would be from the mandatory pension plan. Would this be wise?

Third, is the firm acting illegally? Conceptually, I guess the firm could argue that attorneys are not paid Y% (50% in the above example) of their billings, but some other percentage that just happens to include numbers that are similar to a 401K match and pension percentage. However, I can think of no argument that would support the pension overpay.

Fourth, is my “friend” a co-conspirator in any illegality?

P.S. anyone know of any companies looking for an in-house patent counsel?

2

I don’t know nearly enough about this to begin to answer your questions, but if your friend hasn’t already done so, he should ask for a document called a Summary Plan Description. This is a good first step. Anyone who does know the answers to those questions will want to see the SPD.

3

I’m not really following what you’re saying. If the attny is paying for his own match it isn’t a match.

From your example if an atty makes 15,000.00 a month and elects to take out 2%. His check stub should read Gross Pay…$15,000. 401K $300.00 and the net pay before deductions should read $14,700.00

If the COMPANY is putting funds in at the same rate he is 2% this is not indicated on a pay stub. At least not any payroll I’ve seen or done.

So if you can clear that up for me.

Also just as a general rule…Any benefits given by a company don’t have to be equal as long as they are not discriminitory for protected classes. For example you can’t say women pay for insurance and men get it free. But you could say Directors get free insurance but Associates must pay for it.

4

ya, that’s sorta the whole problem.

Think double books. Of course it doesn’t show up on the pay stub.

The firm issues a separate report that indicates the attorney billed out $30,000 that month. 50% of $30,000 is $15,000.

However, the attorney’s pay stub does not read $15000. The company takes the company’s “match” out of the $15000. If the “pension” were $700 and the “matching” 401K was $300 (the numbers are actually closer to what was mentioned in the first post), then the attorney’s pay stub would read:
gross pay … $14,000;
401K … $300
Federal taxes, Soc. sec. … etc.

Really? I can’t imagine they are playing these games unless they get some sort of tax benefit. When my friend figured out what they were doing, they told him that the entire firm had to be on the same pension plan, or else it was invalid.

5

When I used to contribute to my pension, my pension and deferred comp contribution were taken out of my pay before income taxes were calculated, becasue I didn’t have to pay income taxes on them. On my W-2 form, there were different amounts listed. My wages were listed as the amount I earned after the pension and deferred comp were taken out, and there were separate boxes for social security wages and medicare wages, which were the actual amount I earned in the year. Is it possible that the “gross pay” line on your friends pay stub is in fact a “taxable pay” line?

6

Nope. The system exists as I described it.

7

That may be the case for benefits in general, but not 401(k)s. You are not allowed to treat people differently in a 401(k) plan. In fact, there is a formal annual inspection done by the administrators to ensure that owners and “highly compensated employees” are not getting a disproportionate amount of the benefit. The amount that a HCE can put into the 401(k) is partially dictated by how much everyone else puts in to ensure there is no big disparity.

8

It sounds like there might be two plans, a 401k for admin employees, and another separate plan for the attorneys. You may have mentioned this and I may have missed it, but is the match/contributions from the attorneys a pre-tax deduction? It would also seem that the attorney’s “match” should be vested immediately since it is their money, not the company’s, and isn’t really a “match”.

My understanding is that IRS regulations require that employee contributions be immediately vested and that only a company contribution (either a 401k match or contributions to a defined benefit pension plan) is subject to a vesting schedule. Does this company have their employee handbook on-line? I would love to see the pension/401k SPD.

9

Just one plan.

**

It doesn’t “vest” for 5 years. However, the firm claims that when people leave before the 5 years they cut them a check for the unvested portion.

**

No on-line handbooks. The SPD has already been requested, as per Harriet’s prior suggestion.

10

doreen, As I re-read your post, I am actually not sure what you are saying.

The pay stub shows:

I would presume that if the firm’s pension plan was X% of gross pay, then that X% should be based on the number located in the “Salary” slot, and not some hypothetical salaray created in a separate accounting somewhere.

Once again, the 401K listed on the pay stub only lists the attorney’s contribution, and all the “matching” business (taken out of the attorney’s commission) is done in the separate accounting.

11

Hmmm…After reading all these posts, and being very, very lazy today, I still don’t follow what you’re writing (but that’s my problem). From your last post, it looks like the firm is taking the matching funds out of the Assoc’s commision check. If that’s true, there are two readily apparent problems:

  1. Why is the firm paying an associate a “commission?”

  2. Commission is earned income to the employee, and cannot be “matching” from the employer, b/c it is not the employer’s money.

To the first issue, I still find it difficult to wrap my mind around the idea of attorneys making commission. Anyway, everyone I know at law firms make a regular salary and a bonus at the end of the year. In fact, I think (not too sure about this) it is unethical to fee split in this way, i.e. via commission. Regardless, the only things which is paramount is the way in which the taxable income is determined.

By your example, if I’m reading it correctly, everything looks in order. Except, I’m not too sure what the PREM S125 is.

My firm has profit sharing and a 401(k). The 401(k) is taken out of my salary. When I log on to Vanguard, I can check out my 401(k) portfolio and see how much my employer is matching. The 401(k) deduction is duly noted on my pay stub. As others have stated, the 401(k) is equally applied across the corp.

For my profit-sharing, I click on to another site. My profit-sharing is fully funded by my employer, and the formula is determined by years with the employer and age. I guess there is some discrimination there, on its face, but the age part is such a minor factor in the formula. However, on my pay stub, there is no indication that anything has been taken out to fund it.

This “accounting” (I believe is the correct word) is done wholly on the employer’s books. That is, no one can figure out how the pension plan is funded by only looking at the pay stubs. I’m not sure what you meant by ‘overpay.’

Also, I’m not sure, by your math, how you came up w/putting away 25% – wait, let me rephrase that, let’s just say that I think it’s impossible, by law, to put in more than 12% of your wage into 401(k). Perhaps if you added numbers to your forumla I could be of more help. Then again, tax law was my worst class…

12

Presumably a Section 125 plan for medical spending (and child care). This should be taken out of salary before tax, as correctly shown in the example.

13

Oh that’s what that is. I’ve never used this before, but I suppose I should, you know, to decrease taxable (liability - as I call it) income.

14

Section 125 of the tax code allows pre-tax deductions for health and welfare plans. In addition to Dependent Care and Health Care Reimbursement plan pre-tax deductions, section 125 allows pre-tax deductions for Medical Plan premiums, Dental Plan premiums, and Long Term Disability Plan premiums.

Section 401k of the tax code allows for pre-tax savings plan contributions and the fact that the interest accrues on a tax deferred basis.

15

While this is true, when my company set up a 125 plan, the administrators advised us not to put disability insurance through the plan as it would cause any subsequent disability income to be taxable.

16

There are any number of reasons that the attorneys could be paying the match themselves, but the most logical is if they are partners or owners in the firm. If the firm is a partnership (or one of the many forms of partnership like LLP), then the attorneys who are partners are not deemed to be employees. They would normally not be allowed to participate in the 401(k) plan but would instead be in a separate plan, like an HR10 plan. This could get very complicated, depending on the corporate structure and their actual employment status.

17

You are correct sir! or ma’am. Most companies go with post-tax deductions for LTD premiums for this reason.

Also, what Dexter said about the partnership issue was sort of what I was trying to get at when I said there seemed to be multiple plans.

18

Actually, if you don’t understand, then I have done a poor job of explaining (as is evident from the number of people who haven’t been following).

**

Several patent law firms in silicon valley pay this way, including: Martine & Penilla, LLP, Van Pelt & Yi, and Beyer, Weaver & Thomas. Only the last one actually advertises on their web site “Associates are paid a percentage of their collected billings.”
Yes, C K Dexter Haven, that says “associates”

Once again, with some real numbers:

Assocate has $30,000 in billings. Associate’s percentage is 50%. Associate’s salary (as listed on the pay stub, in the very first line identified 8 posts above) is…$12,870. $12,870 is what is listed in the “EARNINGS” section under “Salary.” Net Pay (the very last line on the pay stub 8 posts above) is something far less after all pre-tax deductions and taxes are withheld.

So, how do we get from $30,000 in billings to $12,870 as net pay? The answer is the firm takes 15,000 and subtracts of the 401K “match” ($420 in the above example) and the pension plan ($1710).

Now, the 401K “match” is easy to figure out. They “match” all contributions at 50%. So, if your 401K election (2nd line in “pre-tax deductions” 8 posts above) is $840, then the “match” is $420. Once again, use of the term “match” is highly misleading.

The pension plan is actually a % of earnings. For all dollars up to about $87,000, 5.7% of your salary is supposed to be contributed into your pension plan. For everything over and above $87,000, 11.4% is contibuted. Taking the 5.7% number, $15,000 x 0.057 = $1710. As I mentioned before (and consider this a side issue for the moment) using the $15,000 to figure out the pension plan number is clearly in error.

So, because of this system, the associate can actually make his gross pay increase by $420 a month if he drops his $840 401K deduction to zero. Wrap your mind around that for a bit. Gross pay will increase if 401K deduction is zero. Net pay will, of course, also increase, but that is to be expected if the 2nd line in the "pre-tax deductions 8 posts above is zeroed out.

So, the associate’s gross pay is reduced by (1) a pension plan that sucks anywhere from 5.7% to 11.4% of your salary (actually, its higher because they use the wrong number) and (2) the 401K match (which, at 50% of the 401K election, can cap out at 6%). Then, the net pay is reduced by the actual 401K election (which might be as high as 12%), and various taxes and medical plans.

So, an associate’s salary might easily be reduced by 25% due to the 3 retirement plans.