Eligible Employees Opt-Out

[Jilliandiz]

I have a client that has a Profit Sharing and Pension Plan. There is an employee who has become eligible in the plan and does not want to receive any benefits he is entitled too. Is there anything I need to do for that besides probably have the eligible participant and the employer sign something saying he wishes to opt out of the benefits???

I know, I said the same thing, why would you want to opt out???? Ha ha!

Thanks.

[mbozek]

The plan has to permit an employee to opt out of particpation. Second, I thought that the employee must opt out before becoming eligible to participant in the plan.

[MGB]

Since when do they have to allow them to opt out???

Participation in any retirement plan can be a mandatory condition of employment. Rarely are employees allowed to opt out of a defined benefit plan in the mid and large market. In the very small plan market it is a little more common and then usually its because an owner or partner wants to.

The main reason why people want to opt out is that they may be able to do better with their own IRA, which gets limited in deductibility if they are a participant.

(OK, now that I read mbozek's statement again, I see it can be interpreted two ways. I interpreted it to say a plan must give a person a chance to opt out. In rereading, I see that it can also mean that the plan must have a provision allowing them to opt out in order to let them opt out, which is a correct statement.)

[GBurns]

I would expect that a non-contributory plan (by the employee) would have participation as a mandatory condition of employment for a number of reasons, ease of administration being one. However, if the employee is contributing there must be an opt-out provision, which even if there was not, and the employee elected $0 as contribution it would have the same effect.

[mbozek]

An employer can require mandatory participation of employees as a condition of employment (like salary or hours of work). However an eligible employee who opts out must be tested under 410(b). There are several valid reasons to allow opting out: In a DB plan or PS plan with deferred vesting, an employee with AGI above the appicable limit can opt out to make a $3000 IRA contribution. (In a PS plan, the owner can require mandatory participation in order to reallocate the forfeitures when the employee leaves.) An older owner can opt out of a DB plan to save the cost of the contributions and plow the savings back into the business which can be sold as a capital asset at retirement avoid avoid overfunding at terminaton of the plan which is subject to a 50% excise tax on reversions.

[Lynn Campbell]

I have a volume submitter document which is silent on the issue of waiving participation. I do not want to revise the Volume Submitter document and therefore require IRS submission... Is the client able to use this document and continue to permit waiver of participation? Under the pre-GUST document, waivers were permitted and 2 employees did waive participation. Both are HCEs...Thanks for all help.

[MGB]

GBurns,

In the couple of dozen contributory plans that I've been the actuary for in the past, none allowed opting out. Also, none had an election feature for the level of contribution (I've never even heard of that before). They were always a fixed contribution rate, e.g., 5%, with the defined benefit completely unrelated to the employee contribution rate.

Oddly, the Portman-Cardin III legislation (HR 1776) would allow employee contributions (maximum 2%) to DB plans be pre-tax ONLY IF the participant is given the right to opt out. Mandatory participants would still get screwed. (I think the original provision was to allow all employee contributions to DB be pre-tax, but the Republicans cut it down to only applying to this limited group and amount.)