increasing deferral elections during year

[Guest Bobclp]

what are the risks associated with giving participants option to increase their deferral percentage or dollar amount during the middle of the plan year? can current election be revoked and replaced by a new election? if so, how frequently - quarterly, monthly?

[Guest wmacdonald]

As you know,all elections must be made before the period of service during which the compensation affected by the election is to be earned. The IRS takes the informal position that the election should be made on a yearly basis, although prevailing case law appears to permit changes at any time, as long as they apply only to compensation not yet payable. As well, the IRS takes the informal position that a plan may permit a participant to revoke his or her election to defer, but the revocation must be done with respect to amounts yet to be earned and the plan must provide that the participant may not elect to defer again until the next calendar year. The latter position is not supported by existing case law. Most of our plans have annual election, although we do have one plan that allows changes quarterly, following the compensation issues mentioned above.