Waiver of Participation

[billfgrady]

Can a 401(k) profit sharing plan participant waive participation in the plan (i.e., no 401(k) elective deferral OR profit sharing contribution) on a going forward (and, I assume, irrevocable) basis if he or she has already been in the plan for years?

I'm quite certain that the answer to this question is "no". The only waiver that I am aware of that is permissible under the Code is the "one-time irrevocable election upon an employee's commencement of employment with the employer or upon the employee's first becoming eligible under any plan of the employer . . ." under Reg. s. 1.401(k)-1(a)(3)(iv). This rule is in place to prevent plans from being interpreted by the Service as a cash or deferred arrangement. Is there another form of waiver or election that applies to folks who are already participants?

[RCK]

Why would they want to do that?

There have been threads here that discussed this type of issue, but I think never in the context of someone who had been in the plan for years already.

RCK

[Mike Preston]

If they really want out, why not have the plan sponsor amend the plan to eliminate the individual?

If the plan document allows waivers of participation, I don't think they are restricted solely to those who have never participated. I'm not an enthusiastic proponent of allowing waivers. They should at least be subject to Plan Administrator review and/or rejection. Otherwise, too many NHCE's might waive out of a plan and threathen its qualification. Sometimes "too many" is 1!

[GBurns]

Is it allowable or possible to, instead of waiving participation, just elect to have no further contributions? Would that not have the same effect from the participant's position without affecting the plan as far as testing etc goes?

[Mike Preston]

With respect to the 401k deferrals, sure. But the OP was dealing with both deferrals and PS contributions.

[GBurns]

In a 401(k) isn't the "profit sharing contribution" usually if not always an employer "match" based on the employee's elective deferral?

If there is no employee deferral then any matching % X $0 = $0

[Tom Poje]

I'd say more often than not, that there is usually a profit sharing contribution rather than a match, especially evident with cross tested plans

[Mike Preston]

No. In my world a "profit sharing contribution" is a "profit sharing contribution." A "match" is a "match."

[GBurns]

Mike

How is allocation usually determined with your PS contributions? A % of deferral, a % of salary etc ?

[RTK]

To your basic question, I do not know of any prohibition in the Code or ERISA against a waiver of participation . I read the regulation you cite as saying that a cash and deferred election does not include the one-time irrevocable election, but not as actually prohibiting the waiver. As already noted in the thread, a waiver would require that the cash or deferred arrangment issue and nondiscriminatory coverage issue be reviewed. If you do proceed, you should make sure that the plan document permits the waiver and a good waiver form is signed.

[Mike Preston]

If it is a percentage of deferral it is a match, no?

[KJohnson]

I think the question you have to ask is: Why is the participant waiving participation in the plan? Is it because he or she will be getting some additional amount in cash or vacation or health benefits etc from the employer ? If so, I think you would have a problem under 1.401(k)-1(e)(6). The participant would be receiving other benefits from the employer in return for not participating in the plan.

[GBurns]

Re:" If it is a percentage of deferral it is a match, no?"

No!!

All apples are fruits but not all fruits are apples.

The employer PS contribution can be based on a variety of formulas. 1 formula could be based on compensation, another could be based on participation (elective deferral). A formula that uses participation (elective deferral) would look like a match but would not be a match. Using the participation (elective deferral) does not make an employer PS contribution a match.

A "match" is specifically a match. Calling an orange an apple because it is a fruit does not make it an apple regardless of any similarities one might find.

[Tom Poje]

You lost me. A profit sharing contribution is referred to as a non-elective contribution. It requires no 'election' on the part of the participant. if you require some type of 'participation'(you said deferrals) on the employees part then you no longer have a nonelective contribution.

It is possible to have a 'mandatory' contribution plan, but now you are talking the DB world.

[Mike Preston]

GBurns: see 1.401(k)-1(e)(6). If you are correct in that you can label an employer contribution that is related to deferrals as something other than a match, the plan will be disqualified for predicating a contribution which is not a match on elective deferrals. I'm afraid that a match is a match, whether you would like to think otherwise or not.

[GBurns]

1.401(k)-1(e)(6) which deals with "Other benefits not contingent upon elective contributions", did not seem to have much relevance except to point to matching contibutions as defined by 1.401(m).

I did not say that anything could be labeled as something else, my post stated "A "match" is specifically a match" etc.

The question that I asked you still remains unanswered

" Mike

How is allocation usually determined with your PS contributions? A % of deferral, a % of salary etc ?"

[Mike Preston]

Disqualifying a plan isn't particularly relevant to you?

In answer to your question, I try to keep plans qualified.

[KJohnson]

You're such a stickler....

[GBurns]

Mike,

What does disqualification have to do with the question that I asked of how you determine how to allocate your PS contributions?

The question of disqualification only arises if one chooses to do something that is not allowed and which is a disqualifiable offense.

The question is just a question not an action taken or a recommendation. Unless your answer would raise other issues or contradict something else that you have said.

[Mike Preston]

I'm saying that having a PS contribution made in a manner which violates the above mentioned regulation will disqualify your plan. PS contributions in 100% of the plans that I consult with are not in any way contingent upon or related to salary deferrals. The only contributions which are in any way contingent upon or related to salary deferrals are matching contributions.

[Mike Preston]

KJohnson... nicest thing I've heard all day.

[mbozek]

IRS Rev. rul 80-351 permits an employee to waive participation in a qualified plan (assuming the plan permits a waiver). However, the waiver does not prevent the employee from being counted under IRC 410(b). If too many non HCE waive out of the plan then plan will fail the minimum participation requirements for a ps allocation. I dont know if a waiver would impact on the ADP % since all eligible employees are deemed to benefit under the plan.

[Mike Preston]

It is my understandng that an individual that waives participation in a 401k plan would be treated as a zero in the ADP test.

[GBurns]

mbozek

Thanks.

This is what I was seeking and also what I think that billfgrady was looking for in the original post. However, Rev Rul 80-351 does not state whether or not there is an actual section of the IRC or Treas Regs that directly addresses the waiver, although it most likely that it is not necessary to have such a section. Do you know of any such a section?

If the employee waives participation (coverage requirements etc not being the issue raised) then there would be no non-elective contribution possible for this employee regardless of the method or formula used for allocating the employer PS contributions. This would serve the purpose that billfgrady seems to need to satisfy.

[Tom Poje]

what type of waiving participation are you referring to?

If it is an irrevocable, one time election, the regs are clear

1.401(k)-1(g)(4)(ii) that such ee is not an eligible employee, therefore he does not show up on the ADP test at all. (That is no different than an ee who fails hours requirement for a match - they are not eligible so do not show up on the test)

If the election is made after someone is eligible to participate then they would show as a zero on the ADP test because they fail to qualify for the 'one-time' election.

for 410(b), since the ee has satisfied the otherwise eligibility requirements, they are treated as includable and not benefiting for coverage.

If I understand things correctly, even if the ee finally terminates with < 500 hours they still are included not benefiting in the ADP test because that exclusion rule only applies to participant.

[KJohnson]

This link has an extensive discussion of the 410(b) testing and ADP/ACP testing issues in an irrevocable waiver situation.

http://benefitslink.com/boards/index.php?a...=ST&f=20&t=4708

When it is not an irrevocable waiver I think you have an issue. I know that some plans allow this, even prototypes, but I think that if the employee is "getting something" for the waiver, you may well have an issue regarding another impermissible CODA within the 401(k) Plan. For what it is worth, the 401(k) Answer Book seems to have a related concern when it says that "Unless the waiver is irrevocable, any such waiver provision could attract the scrutiny of the IRS, which might argue that the ability to rescind the waiver on a year-by-year baisis is tantamount to a cash or deferred election".

The Answer Book goes on to note that unless the waiver meets the "irrevocable" requirements, the "waiving participant" must be included in the ADP and ACP tests as "Os". As Tom notes (and as the reg and the discussion in the post linked above indicate) if the waiver is irrevocable, then I think it is pretty clear that they are not included in the ADP and ACP test at all.

[KJohnson]

BTW--Here is a link to Corbel's opinion on the testing implications of the irrevocable waiver:

http://www.corbel.com/news/faqdetail.asp?ID=23

[maverick]

Yesterday KJohnson asked why the person was opting out of the plan (is the EE getting $$ from the ER as an incentive to stay out of the plan?). Here's another scenario:

ER plans to put in a match (and/or profit sharing) contrib and tells the EE, "If you stay in the plan I'll reduce your salary by the amount of the ER contrib." The mechanics of how to do this, e.g., reduce 2003 salary by 2002 contribution (whatever), aren't important. Sounds like a company I'd really like to work for.

And now to the ridiculous...

Employer has been putting 15% of comp into a profit sharing plan for several years, yet one NHCE opted out. Reason given: "People already know too much about me. I don't want my name in some other system." Go figure.

[mbozek]

M: forcing an employee to waive out of a plan in lieu of having his/her salary reduced so as to provide a contribution could be a violation of ERISA 510. There is a case in the 6th circuit where an employer who reduced an employee's salary by 15% in order to enable the sole proprietor/employer to make a SEP contribution for the employee (e.g., the SEP rules require that the er make a nondiscriminaatory contribution for all eligible employees) was held to have violated ERISA 510, discriminatin against a participant.

[maverick]

Thanks for the info, mbozek. Luckily this employer is not one of our clients. I was told about this "good deal" in connection with "Here's a recordkeeping prospect, what do you think?". I said thanks, but no thanks.

[Tom Poje]

you missed the other reason why someone might opt out of a plan -

you are 'punished' under the IRA rules if you receive a benefit (e.g. even a small allocation of forfeitures)

[billfgrady]

Can anyone speak to when such an irrevocable one-time election must be made? Treas. Reg. Section 1.401(k)-1(a)(3)(iv) suggests that this must be made "upon an employee's commencement of employment with the employer or upon the employee's first becoming eligible under any plan of the employer." What I'm looking for is an interpretation of what an "employee's first becoming eligible" means in the following setting. An employee is hired on June 10, 2002, completes a year of service and satisifies all other eligibility requirements. Accordingly, she is eligible to participate in the employer's plan as of the first dual entry date (i.e., July 1, 2003). Does she "first become eligible" on June 10 or July 1. In other words, does this election need to be made prior to the entry date? What if no profit sharing contributions have been made on her behalf yet?

[Tom Poje]

if she quit between June 10 and July 1 would she have been eligible? I don't believe so, because being employed on the entry date is generally considered a requirement as well.

[billfgrady]

Ok, I follow you. But how long after July 1, 2003 could the election concievably be made? How about August 1, 2003?

[Guest merlin]

Tom, Corbel's typical eligibility section 3.1 says that an Eligible Employee is eligible to participate as of the date he/she completes the eligibility requirements. In section 3.2 it says that the Eligible Employe shall become a Participant on the entry date coinciding with or next following the satisfaction of the eligibility requirements. So it would seem that at least for a Corbel document the person in the example could make the election not to participate any time on or after 6/10/03 but before 7/1/03. Thoughts?

[RTK]

Given the purpose of the one-time election provisions (defining when an employee has a choice between cash and employer plan contributions so as to give rise to a cash or deferred election), I think the reg should be interpreted as requiring the waiver by the July 1 entry date.

(Note that under the regs, the plan at issue must be the first plan of the employer for which the employee is eligible to participate in order to fall within the reg exception.)

[g8r]

I agree. The person first becomes eligible on July 1st.

Also, the other comments here are correct. Under the 401(k) and 402(g) regulations, a one-time irrevocable election made before a person is first eligible is a safe harbor. The election must also apply to all plans of the employer -- even ones not yet established. If someone elects out, the person is treated as not benefiting which could cause a coverage problem if it's an NHCE. The person is not included in the ADP test at all.

If you have a revocable election, you run the risk of having a disguised CODA. If the IRS can prove that someone received additional compensation in lieu of an employer non-elective (or profit sharing contribution or whatever in the heck you want to call a contribution other than a match), then it's a CODA. The entire plan could be disqualified b/c arguably all particpants had the right to make such an election. Thus, what you thought were non-elective p/s contributions actually become elective contributions.

For whatever it's worth, many prototypes allowed revocable elections. But, the IRS tried to crack down on that for GUST. So, many prototype and volume submitter plans now only contain the safe harbor election. It creates an interesting situation where a plan had revocable elections in effect, and now you want to use a prototype that only permits irrevocable elections. The IRS position is that if you use the prototype, the people with revocable elections now must enter the plan and they don't have the opportunity to make an irrevocable election (because it's past the time they were first eligible).

I've seen people attempt to accomplish the same result by excluding individuals from the plan by name (which can be done if you satisfy the ratio % test). Whether this works or not would be based on the facts and circumstances. I was told by an IRS agent (but haven't investigated) that the IRS publication on determination letters states that a determination letter on eligibility exclusions doesn't give you reliance on certain items such as the disguised CODA issue. And, you arguably have the same concern in a cross-tested plan where each employee is in his/her own group. Having a favorable determination letter might not mean that you're safe on this disguised CODA issue.

If you have revocable elections or exclude people by name, the point is to not leave the smoking gun on the table. If you ask a young Dr. why he/she wants out, you'll probably get the answer that he/she can't afford it. To me that's a disguised CODA. On the other hand, I've heard of people who think they already have too much in a plan (this was prior to the market correction that has taken place) or b/c of the deductible IRA rules. As pointed out previously, a small allocation of forfeitures can result in a limit on deductible IRA contributions. So, there are legitimate reasons as to why someone might elect out. But, this being America, if I were an IRS agent I'd be very suspect whenever I see someone electing not to receive a "free" employer contribution.