Waiver of Participation

[Guest lforesz]

A doctor in a C corporation profit sharing plan would like to elect out of the profit sharing contribution for the year since the doctors actually fund their own contribution amounts. The doctors comprise the top rate group in the plan. The document allows for participants to make an election not to participate in the Plan, however, it is silent on when the waiver must be signed.

Question, 1. can he waive participation for the 2000 plan year at this piont in time and 2. Can I still include him in the cross-test with a zero contribution or does he fall out of the test.

Any help is greatly appreciated!

[Fred Payne]

From what I've been told, if the Doc is allowed to "opt out," the IRS could view the Plan as a CODA: His decision to opt out impacts the amount of his taxable income. Our attorney has advised never to allow for this provision; but if it were to be exercised, it's best if it's prior to that Participant's Entry Date and the opt out is permanaent.

[QDROphile]

You have some other problems if you really mean that "the doctors actually fund their own contribution amounts." Except for CODAs and legitimate one-time election amounts, an employer contribution does not reduce a participant's pay. Depending on your contribution and pay scheme and numbers, the economoic effect may be correctly perceived as though income generating employees effectively fund their accounts, but you can't really do that as a matter of form unless you are a partnership.

Better take a close look at the smoke and mirrors.

With respect to your question, if the doctor opted out for the year (which I am not supporting), you could not increase the doctor's pay for the year compared to having the doctor participate. So if you allow the opt out and increase pay you are leaving a trail for an auditor to get through the smoke and mirrors to the improper reality. And an auditor would be interested why the good doctor would want to opt out, because it obviously could not be for the purpose of increasing take home pay. But what other reason would cause the opt-out?

[Earl]

divide the drs into individual rate groups..... seems like it would solve the problem to me.

[Fred Payne]

Easy solution, but how does Treas. Reg 1.410(B)-4(B) come into play? Does this not preclude one from naming individuals as a reasonable job classification? Need there not be an objective business criteria to identify categories of employees? Naming individuals impacts negatively the Non-discrimination classification test.

[Earl]

i don't do naming for the reasons you list. I would look for anything to distinguish them. Dates of birth, Dates of hire, type of doctor or particular service performed (you do ankles, I do backs), any corporate function or office, locations, work at the office, work at the office and the hospital etc.

sure you have to create rate groups but say you create 4 groups and one of the drs. gets $0 and the other three get what they would have gotten, should still pass. I suppose it could happen that the four at $30K passes but 3 @ $30k and 1 @ $0 fails, but I am not sure how....

and back to the original q, i would say 2000 is locked in to whatever was in place at that time and if you did this for 2001 he is still in the test (which is good).

[Guest sdolce]

The criteria you suggest may not be any better than using names directly. The reg refers to classification by name or that have the same effect as nameas being unreasonable.But you also may not have as big a problem as you think. See Reish & Luftman Technical Tip 30 at www.reish.com/practice_areas/TechnicalTips/tip30.cfm. If you're excluding HCEs this will help you pas the ratio % test and keep out of the AB Test.The "reasonable classification" concept is only an issue in the AB Test.Good Luck.

P.S. The link came from a thread posted 6/22/2000.on this same topic.There may be other stuff in the thread that will help also.

[Tom Poje]

You should be able to classify by names for purposes of the allocations. This is slightly different than naming by name who is to be covered by the plan itself, which is what 410(B) refers to