401(k) 'Bottoming-Up' Under IRS Scrutiny Business Insurance (02/25/02) No. 56 p.40; Geisel, Jerry
The IRS is reviewing a technique known as "bottoming-up," in which higher-paid employees contribute more to their 401(k) plans and still have the plans pass discrimination tests. Only a small portion of employers use the technique to help their plans pass discrimination tests, but it can be highly cost-effective while preserving the ability of higher-paid employees to make the maximum allowable contributions to 401(k) plans. The tests are meant to ensure that participation in the plan does not unfairly favor higher-paid employees. In order to pass the tests, employers can limit the percentage of pay higher-paid employees can contribute, or they can implement refunds if contributed amounts surpass the legal limit, but both corrective actions can be problematic.