"Opt In" Provision for MPPP

[Guest Chelmer]

A client maintains a money purchase plan (with no employee contributions) the prior version of which states that an eligible employee (who satisfies the Plan's age and service requirements) must complete an enrollment form in order to become a participant in the Plan. The plan does not have a determination letter. The plan was amended effective 1/1/01 to remove such language (and now the plan is applying for a determination letter). For the years prior to 1/1/01, there were several employees who met the age and service requirements of the Plan but who failed to file an enrollment form and, therefore, did not receive Plan contributions.

I have seen plans with "opt out" or waiver of participation requirements. However, I have not seen a plan like this which requires employees to "opt in" (and states that the failure to do so is deemed a waiver of participation). Does anyone have any experience with the legality of such an "opt in" provision?

Thanks.

[mbozek]

2 issues are involved here:

1. Under ERISA 202(a)(4) an employer can restrict participation in a plan to members of an eligible class as long as the restrictions are not violations of the age or service requirements of ERISA. Legally an employer could restrict participation in the plan to employees who have completed an enrollment form although there is a question of whether participation would be retroactive to the date that the partcipation requirements where satisfied. I am assuming that the enrollment procedure requirement is described in the SPD that was distributed to the employees and that ee were furnished with enrollment forms upon completion of age/service requirements. The failure to notify the employees of the requirement to enroll could result in a claim for benefits by the employees on the grounds of breach of fiduciary duty to administer the plan in accordance with its terms.

2. Treating a failure to complete an enrollment form as a waiver of participation could result in the failure of the plan to meet the minimum participation requirement of IRC 410(B) since the employees who waive count as eligible employees ( e.g., they are included in the denominator). See Rev. rul 80-351. If the plan flunks the 410(B) test then the excluded participants should be added to the plan retroactively.

[jaemmons]

Explain how not completing an enrollment form allows an employer to "exclude" an eligible participant from receiving a contribution that they have earned by satisfying the age and/or service requirement under the plan document? Failure to provide an enrollment form after they have met eligibility requirements does not constitute a consentual waiver to a contribution.

I don't think this is a question of 410(B) because the "waiver" of benefit is an invalid one. An employee does not need to positively consent to a benefit being contributed to a qualified retirement plan, on their behalf, but they must consent in writing to waive that right. Personally, I would think the employer needs to retroactively include those employees, not to mention the fact that they are violating 412 min funding standards.

[mbozek]

Reg. 1.410(a)-3(d) permits a plan to establish other conditions which must be satisfied by by plan participants in addition to age and service. Dol reg 2530.200a-2 provides that except for those rules for which authority to prescribe regs is expressly delegated to the the Secretary of Labor (e.g., definition of an hour of service or year of service) Treasruy regs shall apply under ERISA. While the plan can exclude such persons from participation it must take them into account to determine if the 410(B) requirement is met.

[R. Butler]

I agree with jaemmons, this is pretty straight forward. If an employee meets the age and service requirements and is not a member of an excluded class specifically stated in the document, he/she is elgible. Failure to complete an enrollment form is not an election out of the Plan. I would correct as jaemmons suggests.

1.410(a)-3(d) refers to excluding classes of employees. I doubt it is intended to circumvent the well established principles that a waiver option must be specifically allowed in the document and also that the employee must take affirmative action to make the waiver election.

[mbozek]

J: I believe the facts stated that the plan required the employee to complete an enrollment card in order to be eligible to participate in the plan which is a permissible requirement under Reg. 1.410(a)-3(d) which clearly permits the plan to impose other conditions to eligibility (e.g. geographic location, job category) which are not age or service related. Stupid conditions maybe (but permissible nevertheless). I have represented a DB plan that had a similar requirement . The plan received a favorable determinaton letter.

The problem with this requirement is that it could result in the plan failing the 410(B) test by excluding non HCEs.

[jaemmons]

The exclusion of an employee for not completing an enrollment form is not a justifiable business reason for excluding an employee from participation(i.e.-job class, location). The purpose of adding non-service based or age-based requirements to eligibility is fine, but I have always interpreted that statute to be one which would allow for a legitimate business reason and not one of administrative ease.

I know of many financial institutions which would allow for a default fund to be established for the participant if an enrollment form was not completed.

Mbozek: How did you get a DB plan a favorable determination letter when participant directed investments are not an option for most, if not all, DB plans?

[mbozek]

Do you have a citation to your opinion? As I had noted previously reg. 1.410(a)-3(d) provides that a plan may impose conditions other than age or service which must be satisfied by plan participants. There is nothing that requires a business justificaton for the condition. However the plan must meet the minimum participation of requirements of IRC 410(B). There was no self direction in the DB plan- the plan required that the eligible employee sign and return an enrollment card before particpation would commence.

[jaemmons]

Reg 1.410(B)-4(B) and Reg 1.410(B)-4©(3)(A) based upon application of Reg 1.410(B)-2.

IMO based upon the application of these Regulations, I don't see how completion of an enrollment card can in any way be considered a "bona fide business criteria" for allowing an employer to not contribute on the employee's behalf. This "classification" requirement seems irrelevant in an employer funded pension plan, especially those which do not and are prevented from having participants self-direct their investments. What exactly is the "enrollment card's" purpose with respect to the plan's operation?

Testing for coverage is a moot point if the plan doesn't meet this requirement. I guess it's just another practitioners conservative point of view.