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401(a) with a 414(h) "pick-up"


Guest Wayde A. Friez
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Guest Wayde A. Friez

Q(1). In a defined contribution 401(a) governmental plan with an employer "pick-up" contribution under Sec. 414(h), can the employee be given a one-time enrollment election to 1) elect a zero contribuiton and therefore never participate; 2) elect to participate, but have the option of irrevocably electing from 1 to 10% of base pay and bonus; or 3) irrevocably elect a different percentage from the bonus amount as compared to the base percentage? Alternatively, if this doesn't work, just what might be allowed to give the employees some flexiblilty when enrolling?

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It appears that the IRS has gone even farther than that, at least in private rulings. PLR 200118056 (February 9, 2001) permitted employees to make annual 414(h)(2) elections under a defined contribution plan. Note, however, that the IRS declined to rule on the FICA tax consequences of this arrangement.

Because this ruling does not appear to have been published on the IRS Web site, I am including the text of it in an attachment to this message. You should be able to see it just by clicking on the link below. If you have troubles, and are in Windows, you can try right-clicking on the link, and choosing "Save As," then opening the document after it is downloaded to your computer.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Carol: My impression from the ruling is that the election, once made, applies to all future years. Following is the portion of the ruling describing the election. I would appreciate your comment on this. Also, I have assumed that a governmental plan should not implement such an election without a PLR. Is that your assessment?

"Proposed Amendment Number One provides that each Group B employee, at the beginning of each plan year, may irrevocably elect to participate in the mandatory participant contribution portion of Plan X by electing to contribute 3 percent, 6 percent, or 20 percent of the Group B employee's compensation to Plan X for each plan year. Once made, the Group B employee's election is irrevocable and shall remain in force until the Group B employee ceases to be an employee eligible to participate in Group B or terminates employment."

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On further reflection, I think you are right, Everett. I was initially focused on the part that says:

Proposed Amendment Number One provides that each Group B employee, at the beginning of each plan year, may irrevocably elect to participate in the mandatory participant contribution portion of Plan X by electing to contribute 3 percent, 6 percent, or 20 percent of the Group B employee's compensation to Plan X for each plan year.
I was interpreting this as meaning that the election, although irrevocable, would apply only to a single plan year. (There have been prior rulings that have clearly taken a similar approach in the area of purchased service credit--allowing an employee to make separate "irrevocable" elections with regard to each year purchased, for example.) But I think yours is the more reasonable interpretation.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Guest mmagidson

Everett: I want to be sure I understand your interpretation of the PLR. Are you saying that an employee could decide not to participate in year 1 but in a subsequent year make an election to contribute and that election would then be irrevocable for all future years? In other words, and election not to contribute is not an irrevocable election except for the year for which it is made.

That is my take on the PLR because it says that "..... each Employee, at the beginning of each plan year, may irrevocably elect to participate........" Am I reading it correctly?

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