Can a non-owner waive in and out of participation in a defined benefit plan?

[Guest pensionquestioner]

It is my understanding that a waiver of participation from a 401(k) plan must be irrevocable because of the cash or deferred rules. However, can a participant (who is not an owner and never will be an owner) waive in and out of participation in a defined benefit plan. Please understand that I realize that once an owner accrues a benefit under a defined benefit plan, the owner cannot waive that benefit.

The situation is this - A large not-for-profit has hired a director for one of its divisions. The employment agreement is for one year and requires only 10 hours of work per week. The employment agreement will be renegotiated every year. While it is anticipated that the employee's position shall likely not change to full-time over the years, this is a possibility. Employees are eligible to participate in the defined benefit plan after 6 months of service. The employee is not receiving additional compensation in return for waiving out of the plan.

I do not want to force the employee to sign an irrevocable waiver if I do not have to. If I make the waiver irrevocable and in the future the company wants the employee to move into a full-time position, then the company would not be able to provide a defined benefit accrual for the employee. In other words, must the waiver of participation for a non-owner in defined benefit plan be irrevocable?

[Mike Preston]

As long as the document allows it, an individual can voluntarily elect to not be covered by the plan. However, with the myriad of non-discrimination requirements that a plan faces these days, it is generally not in the Plan's best interest to vest the employees with the power to have a plan disqualified, which is what would happen if "too many" NHCE employees decided to elect not to be covered. One of the more legitimate reasons I've heard for allowing individual employees to elect not to be covered is religious beliefs, although there are others.

Nonetheless, the IRS makes no concessions to any of these legitimate reasons, so a plan is exposed if it puts its fate into the hands of its employees.

Therefore, the sorts of provisions that would allow an individual to elect out of a plan aren't very common any more. And, to the extent they exist, they usually allow the plan sponsor to reject such an election if it would jeopardize the plan's qualified status.

So, let's assume that you have a plan that allows an employee to voluntarily elect out of the plan and that if the individual decided to elect not to be covered, no problems would ensue under any of the various IRS rules (401a26, 410b, 401k,411d6, etc). In that case, there would be no problem with allowing the individual to elect out, from a qualification perspective.

There are other perspectives, however. For example, if the plan design isn't set up to recognize such waivers they may not have the effect intended. For example, a fractional accrual plan without a minimum period over which accrual takes place might not work very well.

So, in short, it is doable. But only if all the tumblers fall into place and it makes sense from every angle. And there are lots of angles. Too many to mention here.

It really needs to have the blessing of an ERISA attorney, and the Plan Administrator and, to the extent there are other advisors familiar with the effect a waiver can have on benefits, other advisors.

[mwyatt]

One question: you mention a work schedule of 10 Hours per week. I know that you have 6 months of service for eligibility (which precludes a 1,000 HoS threshold for eligibility), but one thought comes to mind is your requirement to be credited for a Year of Service for accrual purposes. Assuming you're using a 1,000 requirement, seems that your employee in question will not be credited with Years of Service for accrual purposes. Couldn't you effectively assume in your funding assumptions that current work schedule would be projected into the future, so that no waiver would be necessary (this is predicated on 1,000 threshold being used, not elapsed time for accrual purposes) since the funding (and accrued) benefit would be $0.