How companies shaft employees: Deferred Compensation Plans

Companies, or, more specifically, the “suits” at the top, take unfair advantage of their employees in a number of ways. This is the first in what I hope will be a series of posts about how this is done. The first method I want to discuss is deferred compensation plans. For most employees, this means your 401(k) plan. There are other plans under the Internal Revenue Code (IRC) that qualify, including 401(a), 403(b) and 457 plans, but the main corporate plans are 401(k) plans.

As you may expect, tax deferral is much more beneficial to the most highly compensated employees (HCE). The official IRS term for the rest of us plebes is NHCE, with a “non” at the beginning. I’m not going to get bogged down in the technicalities of who qualifies as an HCE. When deferred comp plans were designed, the potential for abuse was recognized, so the statutes and regulations required that the benefits of the plans be equally available to all employees, not just the HCE’s. Remember, one goal of such plans is to benefit the government by ensuring that most employees save up a nest egg for their retirement years and not become a burden on the state.

One way the law does this is to require the company to allow nearly all employees in. They prohibit the company from making an employee be employed for years before being allowed to participate. They also want to give an employee an incentive to start saving early, so the plans must require the employees to join up relatively quickly once they do become eligible. This is all well and good, and doesn’t hurt the employee. The real problem comes with the “top heavy” rule.

A company plan is “top heavy” if more than 60% of the deferral benefits go to HCE and key employees, basically, the “suits.” If it’s top heavy then the plan isn’t a “qualified plan” and the suits don’t get the deferral they want. The problem for them is that the low-paid employees don’t make enough money to be able to contribute heavily to the plan. They need their entire income just to live day-to-day. Many, if not most, don’t participate at all. One possible solution would be to pay the rank and file more. But no, that would cost too much and they don’t care about the rank-and-file. They take another route. They determine which employees contribute, and how much, and start laying people off. Generally, this is done by contracting out the lowest paid positions like receptionists, janitors, and security guards. This is not only tough on those workers who no longer get the company benefits but it also deprives the other employees of the higher-quality services they get from in-house employees. I’ve been a security director and believe me when I tell you that an in-house guard is much better quality and more loyal than one working for a security contractor. Even mid-level employees doing a good job are at risk of being laid off when times get tough if they don’t contribute to the 401(k) plan. That could be the deciding factor when the final cut is made and they probably wouldn’t even know that it is.

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