Waiver of Participation

[billfgrady]

Can a 401(k) profit sharing plan participant waive participation in the plan (i.e., no 401(k) elective deferral OR profit sharing contribution) on a going forward (and, I assume, irrevocable) basis if he or she has already been in the plan for years?

I'm quite certain that the answer to this question is "no". The only waiver that I am aware of that is permissible under the Code is the "one-time irrevocable election upon an employee's commencement of employment with the employer or upon the employee's first becoming eligible under any plan of the employer . . ." under Reg. s. 1.401(k)-1(a)(3)(iv). This rule is in place to prevent plans from being interpreted by the Service as a cash or deferred arrangement. Is there another form of waiver or election that applies to folks who are already participants?

[RCK]

Why would they want to do that?

There have been threads here that discussed this type of issue, but I think never in the context of someone who had been in the plan for years already.

RCK

[Mike Preston]

If they really want out, why not have the plan sponsor amend the plan to eliminate the individual?

If the plan document allows waivers of participation, I don't think they are restricted solely to those who have never participated. I'm not an enthusiastic proponent of allowing waivers. They should at least be subject to Plan Administrator review and/or rejection. Otherwise, too many NHCE's might waive out of a plan and threathen its qualification. Sometimes "too many" is 1!

[GBurns]

Is it allowable or possible to, instead of waiving participation, just elect to have no further contributions? Would that not have the same effect from the participant's position without affecting the plan as far as testing etc goes?

[Mike Preston]

With respect to the 401k deferrals, sure. But the OP was dealing with both deferrals and PS contributions.

[GBurns]

In a 401(k) isn't the "profit sharing contribution" usually if not always an employer "match" based on the employee's elective deferral?

If there is no employee deferral then any matching % X $0 = $0

[Tom Poje]

I'd say more often than not, that there is usually a profit sharing contribution rather than a match, especially evident with cross tested plans

[Mike Preston]

No. In my world a "profit sharing contribution" is a "profit sharing contribution." A "match" is a "match."

[GBurns]

Mike

How is allocation usually determined with your PS contributions? A % of deferral, a % of salary etc ?

[RTK]

To your basic question, I do not know of any prohibition in the Code or ERISA against a waiver of participation . I read the regulation you cite as saying that a cash and deferred election does not include the one-time irrevocable election, but not as actually prohibiting the waiver. As already noted in the thread, a waiver would require that the cash or deferred arrangment issue and nondiscriminatory coverage issue be reviewed. If you do proceed, you should make sure that the plan document permits the waiver and a good waiver form is signed.

[Mike Preston]

If it is a percentage of deferral it is a match, no?

[KJohnson]

I think the question you have to ask is: Why is the participant waiving participation in the plan? Is it because he or she will be getting some additional amount in cash or vacation or health benefits etc from the employer ? If so, I think you would have a problem under 1.401(k)-1(e)(6). The participant would be receiving other benefits from the employer in return for not participating in the plan.

[GBurns]

Re:" If it is a percentage of deferral it is a match, no?"

No!!

All apples are fruits but not all fruits are apples.

The employer PS contribution can be based on a variety of formulas. 1 formula could be based on compensation, another could be based on participation (elective deferral). A formula that uses participation (elective deferral) would look like a match but would not be a match. Using the participation (elective deferral) does not make an employer PS contribution a match.

A "match" is specifically a match. Calling an orange an apple because it is a fruit does not make it an apple regardless of any similarities one might find.

[Tom Poje]

You lost me. A profit sharing contribution is referred to as a non-elective contribution. It requires no 'election' on the part of the participant. if you require some type of 'participation'(you said deferrals) on the employees part then you no longer have a nonelective contribution.

It is possible to have a 'mandatory' contribution plan, but now you are talking the DB world.

[Mike Preston]

GBurns: see 1.401(k)-1(e)(6). If you are correct in that you can label an employer contribution that is related to deferrals as something other than a match, the plan will be disqualified for predicating a contribution which is not a match on elective deferrals. I'm afraid that a match is a match, whether you would like to think otherwise or not.

[GBurns]

1.401(k)-1(e)(6) which deals with "Other benefits not contingent upon elective contributions", did not seem to have much relevance except to point to matching contibutions as defined by 1.401(m).

I did not say that anything could be labeled as something else, my post stated "A "match" is specifically a match" etc.

The question that I asked you still remains unanswered

" Mike

How is allocation usually determined with your PS contributions? A % of deferral, a % of salary etc ?"

[Mike Preston]

Disqualifying a plan isn't particularly relevant to you?

In answer to your question, I try to keep plans qualified.

[KJohnson]

You're such a stickler....

[GBurns]

Mike,

What does disqualification have to do with the question that I asked of how you determine how to allocate your PS contributions?

The question of disqualification only arises if one chooses to do something that is not allowed and which is a disqualifiable offense.

The question is just a question not an action taken or a recommendation. Unless your answer would raise other issues or contradict something else that you have said.

[Mike Preston]

I'm saying that having a PS contribution made in a manner which violates the above mentioned regulation will disqualify your plan. PS contributions in 100% of the plans that I consult with are not in any way contingent upon or related to salary deferrals. The only contributions which are in any way contingent upon or related to salary deferrals are matching contributions.

[Mike Preston]

KJohnson... nicest thing I've heard all day.

[mbozek]

IRS Rev. rul 80-351 permits an employee to waive participation in a qualified plan (assuming the plan permits a waiver). However, the waiver does not prevent the employee from being counted under IRC 410(b). If too many non HCE waive out of the plan then plan will fail the minimum participation requirements for a ps allocation. I dont know if a waiver would impact on the ADP % since all eligible employees are deemed to benefit under the plan.

[Mike Preston]

It is my understandng that an individual that waives participation in a 401k plan would be treated as a zero in the ADP test.

[GBurns]

mbozek

Thanks.

This is what I was seeking and also what I think that billfgrady was looking for in the original post. However, Rev Rul 80-351 does not state whether or not there is an actual section of the IRC or Treas Regs that directly addresses the waiver, although it most likely that it is not necessary to have such a section. Do you know of any such a section?

If the employee waives participation (coverage requirements etc not being the issue raised) then there would be no non-elective contribution possible for this employee regardless of the method or formula used for allocating the employer PS contributions. This would serve the purpose that billfgrady seems to need to satisfy.

[Tom Poje]

what type of waiving participation are you referring to?

If it is an irrevocable, one time election, the regs are clear

1.401(k)-1(g)(4)(ii) that such ee is not an eligible employee, therefore he does not show up on the ADP test at all. (That is no different than an ee who fails hours requirement for a match - they are not eligible so do not show up on the test)

If the election is made after someone is eligible to participate then they would show as a zero on the ADP test because they fail to qualify for the 'one-time' election.

for 410(b), since the ee has satisfied the otherwise eligibility requirements, they are treated as includable and not benefiting for coverage.

If I understand things correctly, even if the ee finally terminates with < 500 hours they still are included not benefiting in the ADP test because that exclusion rule only applies to participant.