Jump to content

One-time irrevocable election


Richard Anderson

Recommended Posts

Per The Pension Answer Book:

"an employee's elective contributions are treated as not having been made pursuant to a cash-or-deferred election if they are made pursuant to a one-time irrevocable election by the employee to have a specified amount or percentage of compensation (including no amount of compensation) contributed by the employer to the plan for the duration of the employee's employment."

How does this work?

1. Does the plan document have to address this? What if the plan is silent on the issue? Are there prototypes or volume submitter plans that address this?

2. How would an irrevocable election to contribute be handled by payroll? The same as elective deferral? What about W-2?

3. Can an otherwise safe-harbor PS or 401(k) do this?

4. If the plan is general tested I assume that the irrevocable election is tested as a non-elective contribution. Is this correct?

Here are some specifics: The plan is a safe harbor 401(k) that provides 3% non-elective. The person interested in doing this is a NHCE with compensation of $90,000 (20% election). He wants to make a $20,000 irrevocable annual contribution.

Any help on how to do this would be greatly appreciated. What other issues are there?

Link to comment
Share on other sites

An employee cannot make the election if the employee has ever been eligible for a retirement plan of the employer before the election is made. See Tres Reg section 1.401(k)-1(a)(3)(iv). So an employer with a 401(a) retirement plan of any kind could only implement the new feature for new employees.

The feature must be in the plan document.

Link to comment
Share on other sites

I don't remember ever seeing this in a plan document before. Does anyone know of a document that has this feature or where I could find the proper language to use in order to amend a document to allow this?

More facts: The NHCE that wants to do this will first become eligible for the plan on 1/1/02.

Link to comment
Share on other sites

Many plans include language allowing somene to opt out of a plan. I haven't seen any that allow an employee to elect to have a specific contribution made.

The 402(g) regulation is a safe harbor rule. If you don't follow it (i.e., if the election is revocable or made after participation began), it doesn't mean you have a problem. But, it would be highly suspect as to whether the contribution is an elective deferral.

Based on your facts, I think you need to follow the safe harbor standard and have the election made prior to 1/1/02 and make it irrevocable. But, even then, I wouldn't allow it. The person is not an HCE right now but what if that changes. A contriution made pursuant to the irrevocable election is an employer contribution subject to all non-discrimination rules. If that person becomes an HCE, you have a 20% contribution for the HCE and possibly a smaller contribution for the NHCEs. Now you have a problem. The election is irrevocable so now you need to increase the contribution for the NHCEs.

I think that's why you don't see this type of provision in any plans. It would work better if you have an HCE who wants a lower contribution (and more take home pay). Then you don't have the discrimination problem.

Link to comment
Share on other sites

I work with a health care client that uses the one-time irrevocable election plan design. It was put in place back when not-for-profit organizations could not sponsor 401(k) plans. The plan document is drafted by the client's attorney and hence I'm not at liberty to share it. The money is treated as a pre-tax contribution but does not fall within the 402(g) limit so it doesn't affect the 403(B) elective deferrals that employees may also make. There is just one contribution election, so given that a large percentage of employees elect to contribute (there's a fairly large employer contribution for those who contribute and a smaller employer contribution for those who do not contribute), the plan easily passes 401(a)(4) testing because both rate groups pass the ratio percentage test.

As explained by QDROphile, I don't believe this provision helps you in your situation. Since about 1991, the one-time election isn't available to employers who already have sponsored other types of retirement plans.

Link to comment
Share on other sites

I disagree with MWeddell. I think that QDROPhile has it right. The regulation provides as follows:

In no event is an election made after December 23, 1994 treated as one-time irrevocable election under this paragraph if the election is made by an employee who previously became eligible under another plan (whether or not terminated) of the employer.

Kirk Maldonado

Link to comment
Share on other sites

how about creating a job catagory for that person. Then establish a Mony Purchase Plan with the desired % formula excluding all but that person.

If the person becomes HCE, no problem... terminate the plan. There was never an election, irrevocable or otherwise.

Would solve the vesting problem also... (If i agree to reduce my compensation to fund my own contribution, I would expect that I would be 100% vested.)

CBW

Link to comment
Share on other sites

If you establish a money purchase plan and then reduce an employee's pay to fund the contribution, it will look a lot like a one time election arrangement. I wouldn't try it. Of course, if you want to pay the employee and make the additional contribution, too (a legitimate money purchase plan), go ahead.

Link to comment
Share on other sites

I kinda mispoke there....

I would be agreeing to a compensation package of $x in W-2 and a Pension Plan contribution of .25x annually.

I don't see this as a election to reduce. Might be a problem if i am already an employee, but in my scenario (admittedly diff than original question but nevertheless an actual situation) I negotiated it with an employee upon hiring her.

CBW

Link to comment
Share on other sites

Guest Tom Geer

1] The one-time election is available for the first plan eligibility at a new employer. The plan could have been around for many years, as long as the employee hasn't been covered by any other plan of that employer.

2] If the election is made, the amounts contributed are tested as employer contributions. Generally if the employee is an NHCE it's not a problem and if the employee is an HCE you'll end up doing a general test, which may or may not pass depending on demographics.

3] FICA and its kindred should not apply.

4] Clearly you can get the same result with a bunch of separate allocation groups in a cross-tested/new comparability plan. Too many groups are always going to raise the issue of whether the plan operates in fact as a disguised 401(k) plan. The classifications in such a plan do not have to be reasonable, but they do have to be objective and avoid being subterfuges.

5] Prototypes usually do not include appropriate language. Applying it could bump the design out of eligibilty for design-based safe hrbor status, so IRS will likely want a full 5300.

5] The notion of agreeing to a stated salary and a fixed contribution to a retirement plan is certainly available. I would think hard and assess the client's risk-aversion before I mentioned either reducing current compensation levels or creating a cash compensation formula which involves subtracting contributions to the plan.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...