Safe Harbor 401(k)

[Guest Rosemary Raymer]

I have a 401(k) Plan that will become a Safe Harbor 401(k)on January 1, 2003. A few HCEs have signed irrevocable waivers for the current plan. Will they not be able to participate in the Safe Harbor? What happens if in a few years one becomes an NHCE? Then if they don't get an employer safe harbor contribution there's a big problem. These guys want back in now that its going to be safe harbor. Any ideas would be much appreciated!

[Tom Poje]

look up in the dictionary what 'irrevocable' means.

[Guest Rosemary Raymer]

Actually Tom, even though I live in Alabama, I do have a pretty good vocabulary.

Tagdata said "Actually, the answer is not completely clear" and gave arguments both ways. I was hoping for some intelligent discussion here and maybe some old PLR or something that would provide a definitive answer.

Also, the old plan was just a profit sharing plan, not a 401(k) as I mentioned in my original post.

[lkpittman]

Did they sign the waivers before the CODA was added (you stated that the "old" plan was just a PSP)? You could argue that the waiver did not apply to the CODA portion, but I think you're stuck on the PS portion.

One option would be to set up a NEW 401(k) and merge the two plans. This is just "off the cuff" . . . anyone have any comments?

[Tom Poje]

Rosemary:

my answer was a bit tongue in cheek, although that is the answer I have always been taught.

Rereading your question, you indicated that HCEs signed the waiver for the 'current year'. I did not think one could even do that. certainly under the 401k regs 1.401(k)-1(a)(2)(iv)

a"..a one time irrevicable election upon an employee's commencement of employment or upon the employee's first becoming eligible under the plan... on the employee's behalf to the plan and to any other plan of the employer (including plans not established) for the duration of the employee's employment"

or, perhaps I would word it something like

a one time election is not the same as a decision not to defer. If it was, a profit sharing only plan would be in trouble because you have in effect created a 'deferral' arrangement where one didn't exist. The 'irrevocable' part and 'including plans not established' seem pretty clear.

The only question then, would be, could a participant waive participation at a future date if he was already in the plan? personally I don't think so.

The current Corbel language simply says

"an employee may , subject to approval of employer, elect voluntarily not to participate in the plan. The elction not to participate must be communicated to the Employer, in writing, 30 days before the beginning of the plan year."

There is nothing in the document to indicate that the employee can then again elect to particpate at a later date.

And again, I think it boils down to the regs implying that anything other than the one-time election will constitute a deferral arrangement, where one might not exist.

[austin3515]

Tom -

You're initial response as hilarious! Rosemary, its hard to hear sarcasm when its typed in, but he's a good guy and will answer your questions tirelessly...

Tom - why would anyone in their right mind irrevocably elect not to participate??? Something I've never quite understood...

[Tom Poje]

Austin:

Ha. Years ago (grade school) they used to make fun of someone and call him 'Austin Space'. (Of course, as a kid, that was a big television show.)

Anyway, in regards to your question about why someone would elect out.

Possibly a lack of brain cells.

no seriously, there is a legitimate reason. honest. If you were working for a company that made minimal contributions, you might be better off electing out and putting into an IRA. I remember cases where someone might get 25 cents in forfeitures and wouldn't be able to get a full deduction in the IRA. The law may be unfare in this regard, but thats life.

[Brian Gallagher]

a possible reason for electing out:

was the P/S cross tested? maybe the HCE would want the maximum contribution without an "expense" (to himself).

[E as in ERISA]

Tom --

You should look in the dictionary to see how to spell "unfair"!

[Brian Gallagher]

tom also misspelled "irrevocable" above, too. but, hey, who hasn't misspelled (or, rather, probably mistyped) a word here or there?

[Tom Poje]

Brian:

you are correct, or at least your description is more accurate

mistyped words rather than misspelled.

Thanks for sticking up for me!

But I deserve the ribbing anyway.

Being single I was going to say

no one's my 'type' or maybe I haven't met Miss 'Type' yet.

oh well, I gotta catch up some work

[RTK]

Rosemary,

I am not aware of any guidance addressing when and if an irrevocable waiver may be revoked. I assume you have reviewed the applicable plan terms and the hce's waiver to make sure that both provide the waiver is irrevocable in all cases.

From an ERISA perspective, nothing I am aware of in ERISA requires a waiver to be irrevocable. Of course, plan terms must be followed. However, even if a plan requires a waiver to be irrevocable, I see nothing in ERISA that would prohibit an amendment providing for revocable waivers. In such case, the waiver itself should be reviewed to determine if the parties have the right to modify or revoke it. The only ERISA exposure I see off hand is if the plan terms/waiver required irrevocable waiver, revocation of the waiver would not be in accord with plan terms with potential resulting fiduciary liability depending on impact.

The Code perspective is different because of 401(k) regulations. As you likely know, regulations provide that a cash or deferred election is a choice between taxable cash and plan contribution and that a one time irrevocable election between the cash and a plan contribution is not a cash or deferred election. Some IRS agents have applied this as requiring a plan waiver to be irrevocable. However, I don't believe this is required. All is that is required is that cash not be provided in exchange for the election not to participate. This could be an important issue for you, because if your hce in fact received cash compensation in exchange for the waiver, allowing the hce to revoke the waiver could turn the waiver into a 401(k) election. In such case. you would have to review the income tax and plan qualification consequences.