One Time Irrevocable Elections

[Guest Edward McElroy]

A law firm client maintains a profit sharing plan. Several partners made one-time irrevocable elections limiting their contributions to specific dollar amounts (e.g. $10,000). The law firm client is considering establishing a cash balance plan. Are these partners out of luck? I seem to recall a recent change regarding the application of the one-time irrevocable election rules. Any thoughts? Thanks. Ed

[AndyH]

Why would an election in one plan have anything to do with another plan, especially if one is a ps and one is a db? What, for example, if the new plan did not permit waivers?

[Mike Preston]

If the irrevocable elections were intended to be made in conformance with the 401(k) regulations such that the $10,000 would be treated as a non-401(k) deferral, leaving them with the ability to defer further monies on top of the $10,000 (as true deferrals) then those elections apply to all plans of the employer, even those not yet established. What happens if you revoke an irrevocable election? I don't have a clue. But it probably isn't pretty.

[Kirk Maldonado]

If you revoke an irrevocable election, then the election wasn't irrevocable. Thus, the original election would be invalid, causing horrendous problems.

[AndyH]

Would someone mind elaborating on this subject, how a partial profit sharing waiver can affect a cash balance plan, or give me a cite so I can read up on it further? I understand the basic cash or deferred issue, but how does this translate to a future plan of the sponsor?

[Mike Preston]

The purpose of the irrevocable election is to allow the conversion of compensation into plan contributions without having those amounts treated as deferrals for ADP purposes. The goal is to say: yes, it is a deferral, and no, we ignore it in the ADP test.

In order to do this, one must follow 1.401(k)-1(a)(3)(B)(iv).

There is a corresponding rule for counting the employee in the ADP test at all at 1.401(k)-1(g)(4)(ii). I've never actually seen anybody make this election, though, so in my experience anyway it is not nearly as significant as the above reference.

[AndyH]

Thank you Mike.