Waiver of Participation - Disqualification of Plan

[Guest Nadia]

The situation I am dealing with is this . . . Will a qualified profit-sharing plan be "disqualified" if an owner (with a really substantial salary) waives participation in the profit-sharing plan after the close of the plan year (which is when the amount of the contribution is determined) and receives cash equal to the amount of his contribution at the time of his waiver?

Also, would the outcome of this situation be any different if this person were just an employee and not an owner?

My inclination is that this waiver could somehow violate the nondiscrimination rules, but I am not sure if this question should be looked at from a different angle.

I am working under tight time restraints so any quick responses would be greatly appreciated.

[AndyH]

Initial reaction is "What does the plan say?". Does the plan permit this? If not, you are failing to follow the terms of the plan which is a disqualifying operational defect. Doesn't mean you can't fix it, but it is disqualifying at least unless/until fixed.

Sure there are other issues such as discrimination, creation of a cash or deferred arrangement, but I think that failure to follow the terms of the plan is the clearest violation.

[Tom Poje]

much less the plan permit it, does the law permit it?

I thought to waive out of a plan is a one-time irrevocable decision. If the person has already been in the plan, I don't think it can be done. consider a profit sharing only plan - you have in effect, created a CODA where one does not exist.

The plan could always be amended to exclude the person, but that is something slightly different.

For nondiscrimination purposes, employees who waive out would be treated as includable and not benefiting. In the case of an hce this would only help coverage testing

You implied things were done after the end of the plan year - that sounds like a no-no if the person has already accrued the benfit.

Can the person receive cash? Well, of course an owner can take any bonus he wants. he is the owner. But that is different from a contribution.

Based on the info provided, something smells. Maybe, just maybe, if it was the first year of the plan you could argue the individual waived out.

[AndyH]

I agree completely. (I was just using the KISS method).

[Richard Anderson]

Since this was posted to the cross tested board; I have a question.

Is this a new comparability type plan, with separate allocation classes?

If so, is the owner in a separate class?