Is there anyway to exclude 75 year old non HCE from safe harbor?

[Guest MaryC]

We are in the process of converting to a 3% employer contribution plan (from an employee deferral plan only).

We have one management employee who is over 75, makes under the HCE limit, and adamantly does not want to participate. Is there any way around this?

Thank you

[david rigby]

Irrevocable waiver of participation?

[Guest MaryC]

Any chance the waiver would invalidate the

'safe harbor'?

[mbozek]

Employees cannot be excluded from plan on account of age. However plan can provide for a waiver of participation by employee, Rev. Rul 80-351, if nondiscrimination rules are not violated. Waiver may be permissible if it is to employees advantage e.g, employee can make larger contribution to an IRA then benefit accrued under s/h plan. See Olmo, 1979 -286 TC Memo. Perhaps plan can be amended to define eligible employee to exclude any employee who has waived participation in the plan.

[Blinky the 3-eyed Fish]

Nameless Company: Mr. Johnson, we would like to give you some free money.

Mr. Johnson: No, you spiteful, evil jerk!!!

Nameless Company: Mr. Johnson, there are no strings attached to this free money.

Mr. Johnson: Noooooooooooooooooooooooooooooo!!!

Rest of the world: Mr. Johnson is as foolish as the man who built his house on sand.

[david rigby]

Perhaps the plan can be designed to exclude this employee by classification (which would not be "management employees who don't have any sense".)

Would it be appropriate to wonder why Mr. 75-Year-Old is a management employee?

[Guest MaryC]

At this end we have been getting conflicting answers.

Yes, you can exclude by specific classification

No, you cannot exclude unless they are HCE

Yes, you can allow a waiver.

No, waivers invalidate the safe harbor.

No they don't.

I thank you all for your input. I guess we are looking for an absolute answer...Maybe there just isn't such a think in 401K land.

At this point, all input welcome.

MaryC

[Guest JimD]

The 3% must be given to all eligible employees so you cannot exclude by classification. Check your plan regarding waivers. My understanding is that it no longer is allowed in standardized prototypes and must be a one time irrevocable waiver prior to becoming eligible in a non-standardized plan if you are working with a prototype. Even if you are not I don't think he can waive out of the safe harbor.

[mbozek]

Mary: Maybe I put this into perspective with one observation: What is this employee going to do if the employer makes a 3% contribution to his account???Quit. If the er elects to make a contribution to the plan I dont think the employee will do anything except withdraw the money.

[Guest MaryC]

I know, but we all would prefer not to go through the gyrations. There is no benefit to the employee , and more work for all.

Thank you.

mc

[MWeddell]

Actually, it's more work for the employer to exclude the employee.

The safe harbor 401(k) plan rules can be avoided only if the employee is not eligible to make any elective deferrals. Hence, a plan amendment may be required, unless the plan already provides for irrevocable permanent waivers of participation.

The employee may be excluded from participation by name if the plan passes the ratio percentage test. Reasonable classifications are required only if the plan relies on the average benefit test to satisfy the 410(B) coverage test.

[Guest TrustMe401k]

What if the employee "retires" and then the company can hire him back as an independent contractor/consultant (non w-2 income). He'd have no income to be eligible for the 3% nec.

just a thought...

[mbozek]

While that is possible, there could be a 510 claim by the employee that the employer coerced him into retirement to avoid making a contribuution under the plan. Client would need to get some form of voluntary termination agreement/ independent contractor agreement that would specify employee's duties, e.g., cost of a lawyer to avoid potential liability, and I question whether the employee will sign any agreement.

[david rigby]

I have the perfect solution:

- employee does nothing,

- employer makes contribution to the plan on behalf of the employee,

- employee later severs employment and receives a distribution,

- employee sends the money to me.

In the meantime, employee names me as his beneficiary.

[Blinky the 3-eyed Fish]

Pax, your solution is flawed. To make all this happen the employee would have to do something when your first statement is the employee does nothing.

Other than that, it seems like a logical solution.

[Guest TrustMe401k]

mbozek-I never intended to make it sound as thought the employer should coerce, (or give the impression of coercion), the employee to retire. I was simply trying to find a way to let the employee and employer get what they want. Safe harbor status fro the employer and no contribution to the employee. Of course it would have to be a voluntary agreement. If the employee is dead-set against receiving a contribution he may be willing to accept this as the solution.

Pax- I like your solution even better than mine except I would prefer he send the money to me (maybe a 50/50 split?)

[mbozek]

jehmig : It wasn't my intent to allege that you option was coercive-- I was just pointing out that to avoid an allegation of coercion it would be necessary for an employer to get legal waivers and reps which will cost money to prepare.

[AndyH]

Mary, if it makes you feel any better, I recently had an old participant in a DB plan that absolutely refused to provide the employer with his date of birth!. Even after he retired, we could not figure out his entitlement (<$5,000 cashout) because nobody knew how old he was.

He also wanted nothing to do with their DB and PS/K plans. Only when he received a threatening letter about minimum distribution penalties after he left employment did he provide his date of birth.

I think you should just give him the safe harbor contribution and not mess with the possible alternative outcomes.

[Guest MaryC]

Thank you all for your input. You know, there really is no 'free' money. If I were 75 and planed to retire in the next year or so, I might prefer cash in the hand at raise time to that same $ locked up in a 401k that I have to put in, take out, put in, take out, etc. Those who will be in the workforce longer may get some benefit, if only the fact that they have finally started saving something.

Thank you again,

MaryC