gateway and irrevocable election

[Guest shronesz]

I have a cross-tested 401(k) plan with a safe harbor contribution. Everyone is eligible to enter the plan on their date of hire except any phyician employees who have made an irrevocable election to be excluded from the plan. The doctors are includable in the testing. They are not HCE's. Do they have to get a 5% gateway?

[AndyH]

If they don't get a contribution, then they are not benefiting, and if they are not benefiting, they don't need to get the gateway.

[Guest shronesz]

Thanks Andy. But am I correct that they have to be included in the testing?

[Tom Poje]

once they meet the plan's eligibility requirements they have to be included (and obviously treated as not benefiting) in the testing.

[jaemmons]

As long as the physician employees (whom I assume are the "doctors" in question) have valid irrevocable waivers on file, they are not treated as eligible employees for all plan purposes. As such, they are excluded for all plan purposes.

See Regulation 1.401(k)-1(g)(4)(ii)

[Mike Preston]

I don't disagree that they are treated as not benefitting. However, they are not excludable and therefore "count" in the testing. They may count as zeros, but they count.

[Archimage]

I posted this question regarding the irrevocable election on a similar thread as you may have seen:

Here is the reg:

"(ii) Certain one-time elections.--An employee is not an eligible employee merely because the employee, upon commencing employment with the employer or upon the employee's first becoming eligible to make a cash or deferred election under any arrangement of the employer, is given the one-time opportunity to elect, and the employee does in fact elect, not to be eligible to make a cash or deferred election under the plan or any other plan maintained by the employer (including plans not yet established) for the duration of the employee's employment with the employer. This rule applies in addition to the rules in paragraphs (a)(3)(iv) and (a)(6)(ii)© of this section relating to the definition of a cash or deferred election. In no event is an election made after December 23, 1994 treated as a one-time irrevocable election under this paragraph if the election is made by an employee who previously became eligible under another plan (whether or not terminated) of the employer."

I speak English so I can't see how this reg says that a participant is not included in the 401(a)(4) with a zero EBAR. If you do not mind I would appreciate further explanation.

[AndyH]

Does a regulation under 1.401(k) have anything to do with a regulation under 1.401(a)(4) if it is not referenced by 1.401(a)(4)?

[jaemmons]

Any election or waiver to not participate within a plan is viewed as a CODA unless exceptions under the 401(k) regulations apply. One of those exception is contained within 1.401(k)-1(g)(4)(ii). From my interpretation, this section pertains to a waiver to participate or accrue a benefit under any type of plan the employer sponsors, including DB's, MPPP, and Profit sharing only plans. It does not only pertain to plans which already contain a CODA.

In order for the one-time election to not be viewed as a CODA, the employee must irrevocably elect to not be eligible to make any CODA under any plan maintained by the employer for the duration of their employment. To me this means that if an employee is irrevocably waiving participation in the plan, before they ever become eligible, this applies across the board to all money types available within the plan (e.g.-deferral, match and profit sharing). Therefore, by application of this regulation, the employee's signing of a timely irrevocabel waiver would make them an ineligible employee under the plan, who is not counted in any tests for the plan.

If the employee signs a revocable waiver, then I would agree with including him/her in testing as an eligible employee, as the revocation of any election or waiver would constitute a CODA.

[Archimage]

Jaemmons, thanks for your interpretation. Let me throw this out. Sal Tripodi says in The ERISA Outline Book that "to pass 401(a)(4), every rate group must satisfy the coverage requirements of 410(B). Both the ratio test and the ABT are available for this purpose." This leads me to the conclusion that you would include them in the general nondiscrim test.

[jaemmons]

How if they are considered not to be an eligible employee? By definition in most plan documents an "eligible employee" means any employee of the employer.

If a timely irrevocable waiver is signed, then it seems to me that they would not be an "employee". Thus, they would not be counted for any plan purpose.

[Archimage]

Try reading 1.401(k)-1(a)(3)(iv) and see if this changes your mind. It basically says that an election not to receive ER contributions doesn't cause them to be treated as a CODA.

[Mike Preston]

Perhaps an analogy would help. Assume you have an employer with 10 employees, all of which are statutorily eligible. Of the 10 employees, there are 7 HCE's and 3 NHCE's. Let's assume the document language is such that one of the NHCE's is not eligible for the plan, based on a clearly reasonable business class. This one NHCE is not in the plan, has never been eligible for the plan and will never receive a benefit in the plan.

Nonetheless, this NHCE _is_ taken into account under the tests that we must perform. That is, the ratio percentage of the plan is only 66%. If this plan doesn't satisfy the ABT, this plan will not pass coverage.

Let me state it another way. If an employer allowed enough individuals to sign irrevocable elections such that the plan would fail 410(B) coverage, the only alternative for the plan sponsor would be to shut down the plans. They wouldn't be qualified. Tough result, but I think consistent with the regs.

[Blinky the 3-eyed Fish]

If it were permissible to completely exclude from testing those that signed irrevocable waivers, that would be part of the paperwork small employers would have their employees sign when hired.