Employees refuse Employer's Profit Sharing Contribution!

[Guest Sara H]

One of our agents called me with this question. A non-profit employer has a 2 year old 401(k) profit sharing plan. Previously they maintained a 403b (for approx. 10 years). At the plan year end, they calculate their profit sharing contribution. In preparation to send the money in, the employer requests that employees with no investment instructions on file fill out enrollment forms. There have been a couple of employees who have refused and continue to refuse to fill out the forms and tell the employer that they don't want the contributions!!!! They have also filled out "waiver forms".

I informed the agent that I think the employer should send the money in for the employees anyway, setting accounts up for these employees and the trustee should choose the investments. I also told him that in the case of an audit the employer could be responsible for paying the contributions for the past 10+ years to those employees who refused them plus interest.

Could anybody give me some feedback as to whether the employer is allowed to just not give the profit sharing contribution if the employee says they don't want it?

[david rigby]

I think a waiver, if elected, has to be irrevocable. That probably should be included in a "waiver documentation. That said, I don't know if the plan must permit such a waiver.

The employer might want to ask him/her self if an employee who refuses free money has the necessary intellectual capacity to be an employee.

[pmacduff]

Pax - I agree, but in defense of the employees, the original post does say that it is a non-profit organization - I worked with some not-for-profits myself including a large church plan, there were many participants who wanted to refuse Pension benefits because they did not want to "put an undue financial burden" on their Church as Employer. I know that it isn't logical to a lot of us, but just wanted to point out that there could be other motivation for an employee to refuse benefits.

[Appleby]

True,

There are also religious reasons why some individuals may refuse plan contributions- something about being compensated outside of their regular earnings diminishes what they do for their religion .

[Guest Sara H]

OK, so say the plan is audited. Would you say that the employer not be held responsible for not submitting those contributions for the people who refused them?

[Guest pineapple]

Unless the plan documents specifically allows employees to waive participation, and the employee completes a valid waiver form, the employee becomes a participant and the employer MUST make the contribution for the employee.

As far as the investment, the employer can just establish a default investment election.

Finally, point out to the participant that at the time they receive their distribution, they can always donate the money to charity (minus the necessary tax withholding of course).

[Belgarath]

Also, there are some (albeit rare) circumstances where the employer contribution is very low, yet the income of the participant is sufficient so that the loss of IRA deduction is greater than the contribution they receive.

[Archimage]

Sara H,

see if the employees that do not want the contribution would be willing to give it to me.

[david rigby]

Interesting points made by pmacduff and Appleby. I wonder, if this were a (presumably non-electing) church plan, whether the irrevocable requirement for a waiver would still apply. Any ideas?

Regardless, I do agree with pineapple's comment that the plan document should permit a revocation.

[mbozek]

Why not either (1) allow employees to waive contributions under the terms of the plan, (2) tell employees that they can make a charity of their choice the beneficiary of their benefits under the plan or (3) create a classificaton that excludes employees whose religious conviction prevents the making of contributions on their behalf- as long as the plan covers a non discriminatory group it should not be required to provide a benefit in violation of an employees religious beliefs.