Waiver of participation issues

[AndyH]

In a general tested profit sharing plan where an HCE who meets the eligiblilty requirements waives participation, is he/she in the general test as a 0% (as opposed to being out of the test)?

Can his comp be used for 404?

I think the answers are yes and no. Agree? Disagree?

But if so, if he/she were instead to get a contribution of $1, the comp could be used for 404, correct?

[Guest]

your statements sounds correct to me although if he gets allocated a $1 then he/she moves from includavle/not benefitting to includable and benefitting.

You sound like that ad...can't buy much with $1....silly man...

[jaemmons]

When did the HCE waive participation? If it was before the beginning of the plan year and constitutes a revocable waiver, he/she is included in the general test as a "0" and his/her compensation is included in the 404 deduction limit. However, if the waiver was made at any time during the plan year, this can be considered a CODA, if his/her compensation is impacted by the waiver (i.e.-comp is increased by a similar amount as what would have been contributed.) In any case, for the waiver to be valid (you may want to refer to your plan document as to the timing of when waivers may be made) it should take place before the beginning of the plan year.

Also, if the entity is an LLC or a partnership, the waiver would automatically constitute a CODA under Reg 1.401(k)-1(a)(6)(ii). If your plan document does not permit elective deferrals, you will have problems with having a nonqualified CODA within your PSP.

In addition, is the $1 allocation set forth in your plan document?

[AndyH]

Do you mean "irrevocable" in your second sentence? Thanks for the responses.

In answer to your questions, my question relates to a new plan being designed. It is hypothetical, so the plan can say whatever within reason we want. I agree with the points you've made, except as noted above.

[jaemmons]

Andy,

No, I did mean "revocable". If the waiver was irrevocable, then it would need to be made before the participant becomes eligible under any plan of the employer. Also, if properly executed, these employees would be excluded from all plan testing and deductibility computation. A revocable waiver has the opposite effect, but the timing of these waivers may give rise to a nonqualified CODA. In any case, both types of waivers must be made before the beginning of the plan year in which they will accrue a benefit. Sorry for the confusion.