Waiving out of 401(k) Plan

[Guest KMP]

I have a 401(k)/profit sharing plan that the 2 HCE's (one of which is the owner) waived out of the plan irrevocably (not sure why). They are now looking to shelter some money somehow, and we are starting to think of a way to do this. Would the waiver from the profit sharing plan prevent them from implementing a cash balance plan? If so, what would you suggest, other than terminating the plan and starting over due to them waiving out of the profit sharing plan they now have in place?

[Tom Poje]

I'd look at 1.401(k)-1(a)(3)(iv)

the waiver applies to ...'any other plan of the employer (including plans not yet established)...

or, in terms of Papa IRS

Too Bad

So Sad

Your Dad

can you say Non Qualified Plan?

[Guest jfp]

Tom Poje:

I have a different take on this.

First, I believe that the operative provision is the exception to the definition of "eligible employee" in 1.401(k)-1(g)(4)(ii).

Second, while that provision is relevant for purposes of determining whether you have to count the employee as an eligible employee (e.g., for ADP/ACP testing purposes), I'm not sure it's binding on a subsequent plan for qualification purposes.

Third, that provision relates only to subsequent plans that provide a cash or deferred election. so it would seem to have no application to a d.b. plan.

Fourth, the provision only deals with irrevocable elections by employees. If the employer is a corporation and its Board of Directors sets up a new plan with no exclusions. I would argue that nobody is "revoking an election."

Therefore, I would argue that the analysis is as follows. (1) If they set up a new plan and do not exclude the two HCEs, that's ok insofar as the qualified status of both the new plan and the old plan are concerned. (2) In a worst case scenario, if the new plan has a CODA, and if step (1) is viewed as somehow invalidating the "irrevocable election" with respect to the old plan, I would think that there would be no consequences to this as long as the old plan always passed ADP and ACP without counting the 0% contributiions by and for the two HCEs.

[Tom Poje]

actually the rest of the cite says

'any other plan of the employer (including plans not yet established)...

...for the duration of the employee's employment with the employer, or in the case of a defined benefit to receive accruals or other benefits (or no benefits) under such plans.'

..............

I'm not convinced how you get around 'duration of employment' and 'no benefits', but it could be I'm too conservative.

as to KMP's comment about why someone would 'elect out', the only one I have ever come up with is to be able to put into an IRA, especially since the ees were HCEs.

[Guest jfp]

No, you are not correct; the provision which I cited does not say what you said it says. You are looking at a different provision. I believe that the provision which I cited is the provision most relevant to the poster's question.