Waiver of Participation

[Randy Watson]

Upon commencement of employment, employees elected not to participate in the employer's profit sharing plan. The plan has since been amended to include a 401(k) feature. Can these employees now elect to participate in the plan? The employees are only going to participate in the 401(k) feature of the plan and will be excluded from participating in the profit sharing feature.

I'm having a tough time figuring out the extent to which Reg. Section 1.401(k)-1(a)(iv) impacts these elections. Any comments?

[Randy Watson]

The problem is that the regulations permit a participant to use a one-time irrevocable election without creating a CODA. But now with the added 401(k) feature we have a CODA, so it seems like there is no consequence to creating a CODA with a second election. Am I out of my mind (for reasons other than responding to my own post)?

I appolgize for citing the old regs.

[Bird]

If it was an irrevocable waiver, as it should have been, I don't see how they can now participate in the plan. I mean, I hear the logic of "so what if we create a coda" but I don't think that's the issue.

[Tom Poje]

just what part of 'irrevocable' means 'unless you put in a 401(k) feature'

or when the regs say it is irrevocabe 'on the employee's behalf to the plan and to any other plan for the employer (INCLUDING PLANS NOT YET ESTABLISHED) for the duration of the employee's employment..' 1.401(k)-1(a)(3)(iv)

New regs is 1.401(k)-1(a)(3)(v) - worded slightly different but it says the same thing

again, it doesn't say 'INCLUDING PLANS NOT YET ESTABLISHED unless they are a 401(k)'

emphasis mine, but not meant to be interpreted as screaming or any such thing.

[Blinky the 3-eyed Fish]

I am wondering how this plan ever passed coverage considering these waivers were in place.

[Randy Watson]

Very good comments.

It was a very small number of HCEs that elected not to participate. I have no idea why they elected out.

Thanks for the input!

[Guest Midas]

I was glad to see this post. This is an area I have been struggling with.

Can someone please help me understand what Sal is saying here? The post note on the one-time irrevocable election outlines that the one-time election not to make salary deferrals is different than the one-time election not to receive employer contributions (not creating a CODA). It makes it sound like the two are different. So do you need one for both deferral and employer contributions?

See below...

One-time irrevocable election. If the employee makes a one-time, irrevocable election not to make a cash or deferred election under the section 401(k) plan (or under any cash or deferred arrangement that is part of another plan maintained by the employer, including plans not yet established) for the duration of his/her employment, the employee is not treated as an eligible employee under the

401(k) plan, and is excluded from the ADP test. This rule applies only if the employee makes the election upon commencing employment with the employer, or when the employee is first eligible to make a cash or deferred election under any cash or deferred arrangement maintained by the employer. See Treas. Reg.

§1.401(k)-1(g)(4)(ii). (Prop. Treas. Reg. §1.401(k)-6 (July 17, 2003), in paragraph (3) of the eligible employee definition, would continue this rule without change.)

POST NOTE....Separate from irrevocable election rule pertaining to whether a plan contains a cash or deferred arrangement. Current regulations provide that a cash or deferred arrangement does not exist merely because an employee may elect a specified level (including zero) of employer contributions, if that election is irrevocable and is made no later than the first day the individual is eligible for any plan maintained by the employer. See Treas. Reg. §1.401(k)-1(a)(3)(iv) (§1.401(k)-1(a)(3)(v) in the proposed regulations issued on July 17, 2003) and the discussion in Part C of the cash or deferred arrangement definition in Chapter 1. The purpose of this rule is to ensure that the irrevocable election will not cause

the employer contributions made on the individual’s behalf, pursuant to the election, to be treated as elective deferrals. Thus, the existence of such an election does not cause the plan to be treated as having a cash or deferred arrangement. This rule is separate from the rule described in the prior paragraph. The rule in the prior paragraph applies solely to the right to make a cash or deferred election (e.g., salary reduction election) in the future, and goes to the issue of whether the individual is eligible to make elective deferrals under the plan.

[Bird]

The one-time election not to participate in a CODA means the person can be excluded from testing (actually I've never done that so I don't know if there's more to it or not).

But the Post Note regards a different matter - inadvertently creating a CODA. IOW, if you let a participant waive participation in a PS plan without a CODA, and you give that participant additional compensation outside the plan, you have effectively created a CODA, subject to testing and limits. If you don't want that result, then the employee must waive participation irrevocably.

(IMO this is a terrible idea and you should simply amend the plan to exclude the employee.)

Hope this helps.