Opting Out vs Testing

[DP]

I am setting up a new Safe Harbor PS 401k plan with a cross-tested contribution formula. One of the HCE's has opted not to participate in the plan. Do I use him for the general test or ignore him all together?

Thanks.

[Tom Poje]

If someone has met the plan's eligibility requirements, they are includable. If they got zippo, then they will show with a zero.

For coverage, includable and not benefiting under 401k, 401m and nonelective.

For nondiscrim testing:

ADP test, ACP test - not on (assuming this is the one time election to not participate in the plan (as opposed to not deferring) and all future plans

nonelective - on test with zero.

[DP]

Thanks, Tom. What about the 3% Safe Harbor non-elective contribution? The plan states it will be given to all participants (HCEs included). If this HCE has opted out of the plan, can we get by with not giving him the 3% SH contribution?

This is a new plan effective 1/1/05. This HCE is opting out of the plan before it becomes effective.

[Tom Poje]

well,1.401(k)-1(a)(3)(iv) talks about 0ne time elections. They are NOT treated as a cash or deferred election.

irrevocable, and only if first becoming eligible under ANY plan of the employer.

(Therefore, if there was a prior existing plan, it is too late)(see example 3 that follows in the regs) ee can not participate in any plan that might be established in the future as well.

If it is an actual one time election, then the election is not considered to be a decision to defer 0, but rather, the ee has elected out of the plan and therefore is not eligible. [safe harbors only need go to eligible ees.]

I would assume based on the regs to read that if someone elected out of the plan (but would not be considered a one-time election) then such an election would be considered a cash or deferred election.

Or at least that is how I would understand it.

........

Perhaps another way of looking at it, if you excluded all hourly people from the plan, would you provide a safe-harbor to them? They are not eligible, so I wouldn't think so. You might not pass coverage, but...

[actuarysmith]

When you say "Opt out" - do you mean an irrevocable election not to contribute? OR do you mean that this HCE just does not plan to contribute NOR do they wish to recieve and employer allocation?

The latter approach might be more beneficial to your testing results.....

In other words, they are getting an allocation of 0% (i.e. EBAR of 0%) - this will clearly help things with regards to testing.

[DP]

The HCE is making a one-time irrevocable election not to be included in any part of the plan.