Revoking an election

[E as in ERISA]

Is a 401(k) plan required to allow participants to revoke their deferral elections at any time?

[E as in ERISA]

I see the thread labeled "When to allow change in deferral amount" that concludes either (a) state laws may govern the issue, or (B) there is no law requiring that participants be allowed to stop deferring at any time.

[Guest TrustMe401k]

Check the document. Our prototype specifically states that a participant may "revoke" his decision to defer at any time while allowing limits on the times to change the deferral rates.

If the document does not expressly state the option. I'm not sure.

[mbozek]

I have always understood that deferral of compensation in a 401(k) plan was elective at the option of the employee. Otherwise the employer could force high contribution levels as % of comp by nhce to increase the ADP % for the hces. Also state laws are preempted by ERISA.

[Kirk Maldonado]

mbozek:

I don't think that employees have any rights greater than what is stated in the plan. If the plan only allows changes in contribution amounts (including complete cessation) on a quarterly basis, then the employee can only change the contribution amount quarterly.

If you are aware of any statute, regulation, ruling, or court decision to the contrary, I'd be very interested in seeing it.

[mbozek]

KIrk_ I agree that the plan can restrict the employees timing of a change but I my comment was directed the previous post which was not sure that a participant could revoke an election if the plan does not expressly state. It is my understanding that elective contributions must offer the employee a choice between cash and making a contribution. I dont believe that a plan could prevent an employee from revoking or changing an election after it is made although it could restrict the timing to reasonable limits. I have never heard of a plan that did not permit a participant to change a salary reduction contribution after its was made.

[E as in ERISA]

Thanks. My question was one of timing of the revocation -- e.g., can the plan provide that participants can revoke their elections only once per year vs. allow them to revoke their elections every payroll.

[R. Butler]

I'd be leary of not allowing a participant to revoke a salary reduction agreement. If you want to keep this from happening try to amend the document to specify that once a participant revokes he can't pick back up until the next plan year. I've seen this provision frequently.

[MWeddell]

While many plan documents will permit participants to suspend their contributions at any time even when they limit the frequency of other deferral election changes, this is not legally required.

Proving that something is NOT prohibited isn't easy. If you look at Treas. Reg. 1.401(k)-1(a)(3)(iv), the circumstances for which one can have a one-time irrevocable election and still not be subject to 401(k) are limited. The negative inference from that provision is that one can have an election that is irrevocable for a year and it would still be a cash or deferred arrangement.

[E as in ERISA]

But it might not be a "qualified" cash or deferred arrangement!

The closest I've seen to an IRS requirement that there be regular opportunity to revoke an election is contained in Rev. Ruls. 98-30 and 2000-8 (re automatic 401k contributions). They say that in order to meet the cash availability requirement in 1.401(k)-1(e)(2), an employee must have a reasonable period to make the election (to opt out of the automatic 401k contribution) before the date on which the cash is currently available.

[pjkoehler]

Katherine: In a negative election context, the participant must make an "opt-out" election to prevent the automatic election from becoming effective. A close reading of RR 2000-8 reveals that a CODA will not fail to be a qualified CODA in a negative election setting, "provided that the employee had an effective opportunity to elect to receive an amount in cash. The employee has an effective opportunity to receive an amount in cash ... if the employee receives notice of the availability of the election and the employee has a reasonable period before the cash is currently available to make the election." The election the ruling is talking about is distinguishable from a right the participant may or may not have under the terms of the plan to revoke a prior deferral election. I don't think this ruling can be used to bootstrap a right of revocation as an element of the qualified CODA requirements.

[E as in ERISA]

I understand those ruling don't apply to traditional 401k plans. However, traditional plans must still meet the "cash availability" requirement somehow. So then consider this example: Participant A is employed by Company A which has a traditional plan and on day one affirmatively elects a 3% contribution. Participant B is employed by Company B which has an automatic enrollment provision with a 3% contribution and on day one chooses to do nothing and defaults to 3%. The auto enrollment rulings allow Participant B the opportunity to re-consider his 3% contribution every payroll or every month (some reasonable period). Shouldn't Participant A be entitled to the same opportunity?

[pjkoehler]

Katherine: I don't think anyone is arguing that it makes sense to design a plan that doesn't provide for the participant's right to revoke periodically an earlier election, regardless of whether it's made in a negative or affirmative context. But, I can't find any guidance in the two rev rulings you cited that supports the position that this is a requirement of a qualfied CODA. The requisite "effective opportunity" to make a CODA election exists if the employee has a "reasonable period to make the election before the date on which the cash is currently available." Clearly, an opportunity to make a CODA election with respect to the compensation earned, for example, 24 bi-weekly payroll periods later is a "reasonable period . . . before that date on which the cash is currently available." The revocability of that election is a separate issue that isn't considered in these rulings. So, for example, nothing in these rulings suggests that a plan that requires a CODA election must be made by December 1 with respect to the following calendar year would not have a qualified CODA merely because it also provides that such election is irrevocable for each payroll period that begins in the following calendar year. Again, this is not say this is a sensible plan design, just that the revocability of the prior election is not governed by Sec. 401(k) or the regs. Which is probably why plans vary so much on the terms and conditions of revocability.

[E as in ERISA]

Here is the actual problem: We have just become aware that the software to which we are converting does not distinguish between a change in deferral percentage and a revocation of a deferral. So if a plan allows one change in percentage per year (e.g., from 5 to 7 percent) plus revocation (i.e., zero percent), then it is impossible to code it correctly. If you put in "one" change, then a participant who has changed from 5 to 7 earlier in the year can't revoke the election later. If you fix it by putting in "two" changes (to allow one change and one revocation), then a participant might change their percentage twice and then still be disallowed from revoking later. And so on. We are dealing with hundreds of plans and thousands of employees and changes through the web and IVR, so we can't monitor this manually.

I believe that the software must be changed, because we must have some way in the system to reserve the revocation option for participants. I think we all recognize that the 401k regulations require availability of cash on some reasonable basis. But we also recognize that it's not clear what "reasonable" is (one year, one month, etc.).

As you've noted there is very little guidance regarding revocation. The best I've found is in the automatic enrollment rulings. I think they support the conclusion that a plan must provide a reasonable opportunity to revoke an election and receive cash.

[MWeddell]

Katherine,

Isn't the structure of Code Sections 401(a) and 401(k) something like "If you meet these requirements, your plan is qualified?" If something is left unstated, then it's allowed. If Congress or the IRS wanted to require that participants may suspend their cash or deferred elections at any time, sometime during the last 20 years they should have said so. Saying that a suspension at any time is required in an automatic enrollment context doesn't strike me as implying that a suspension is always required.

Like I said earlier, proving a negative, that something is NOT prohibited, is difficult. Your response to my earlier argument is technically correct -- sure it could be a nonqualified cash or deferred arrangement -- but I have a hard time envisioning the IRS drafting that regulatory provision if it thought that a qualified cash or deferred arrangement had to permit participants to suspend contributions at any time.

On the other hand, if you want to allow contribution changes and suspensions at any time, that's probably a more sensible plan design decision. I just don't think it's legally required.