Minimum Age Requirement

[SRP]

The plan document allows for no minimum age requirement and therefore an employee is deemed to satisfy the age requirement upon hire.

However, is there any issue at a state level that could affect this participant's eligibility due the contractual nature of an enrollment form.

For example, say that a state has a contracts rule where a valid contract requires all parties to be age of majority (i.e. age 18). Is it possible that an employee age 16 entering into a salary deferral agreement with the employer could be creating an invalid or unenforceable contract?

I understand that ERISA rules have supremacy over state rules. It appears to me somewhat that ERISA may not have a specific rule regarding a deferral agreement (as a contract) and in the absence of a federal rule (such as ERISA) the state rule would hold.

Any thoughts?

[masteff]

Rules applicable to cash or deferred elections are specified by IRS Reg section 1.401(k)-1(a)(3).

[SRP]

This is the most pertinent language from 1.401-1(a)3 that I can find:

A cash or deferred election includes a salary reduction agreement

between an employee and employer under which a contribution is made

under a plan only if the employee elects to reduce cash compensation or

to forgo an increase in cash compensation.

This is still not clear to me - aside from the fact that even the regs are referring to it as an "agreement" (implied as "contract"?).

I normally have not had eligibility prior to age 18 - but have a client insisting upon it. I would like to understand if there are state specific contract laws that may create issues if the minimum age requirement is less than 18.

Any more thoughts?

[Peter Gulia]

ERISA § 514(a) preempts a State law that “relate to” an employee-benefit plan. Many lawyers and judges continue to argue about what those quoted words mean. But I wonder how a State law that would govern a wage-reduction election may be said not to “relate” to a § 401(k) plan if that election is the only way an employee can contribute to the plan?

ERISA preempts a State law that “relate to” an employee-benefit plan, even if all 50+ States (see ERISA § 3(10)) have the same law on a point. Still, Congress’s legislative purpose for ERISA’s preemption rule becomes yet clearer if the point is one on which States’ laws differ. The general age of competence differs from State to State (although most are at 18, a few are at 19 or 21), and some States provide different competence ages for different kinds of acts. Further, some States’ laws provide differing kinds of exceptions concerning one who is an employee before the relevant competence age. And States’ laws differ concerning the effect of a minor’s misrepresentation about his or her age.

SRP, we don’t know whether your client is the employer, the plan administrator, a potential participant, or a different person, and what advice you might give (if any) turns on your role. Consider this: the risk is on the employer, and your description suggests that the employer is willing to accept that risk. If ERISA doesn’t preempt State law and the employee disaffirms the deferral election, the employer must pay its employee’s “back” wages. Before giving any advice, consider at least the possibility of differing interests from one person to the next.

Unless the employer’s demand for a return from the plan is sooner than one year after the employer’s payment of the contribution that was in exchange for the wage reduction AND the employer proves to the plan fiduciaries’ satisfaction that the employer paid the contribution innocently under a good-faith mistake of fact, a plan would refuse to return money to the employer. See ERISA § 403©(2)(A)(i). Because clause (i) refers only to “a mistake of fact” while clause (ii) (concerning a multiemployer plan) refers to “a mistake of fact or law”, a court might use a whole-statute or every-word-must-have-meaning construction maxim to interpret that the 93rd Congress must have meant that being uncertain about how laws would apply to a particular set of facts is not a mistake of fact.

Even if State law concerning a disaffirmed contract requires a disaffirming person to return to his or her counterparty whatever remains of what was received from the counterparty in exchange for the disaffirmed promise, that applies to the disaffirming person. Except perhaps for undoing the disaffirming person’s fraudulent transfer, it’s doubtful that a court could order a third person to implement such a return. (Remember that the plan is a separate person.) It also might be troublesome regarding an ERISA-governed pension plan that precludes a participant’s alienation of his or her right under the plan.

Conversely, if an employer - after understanding the risks that could be in play if ERISA doesn’t preempt State laws - is reluctant to accept a deferral election of an otherwise eligible employee, the employer might take practical steps to cause the employee or the plan administrator to put the issues before a Federal court.

[SRP]

Thank you very much.

That helps a great deal.

I am a TPA and this is for a 401(k) plan client {a law firm}.

I have instructed them that they need competent ERISA counsel to determine if the state law may arise for a 16yr old employee making a deferral election.

We generally keep things as simple for our 401(k) clients and normally allow age 18 as the lowest age for plan eligibility requirements.

Thank you very much for the informative answer.

[jpod]

I have a more fundamental question (or at least a comment in the form of a question). Why in heaven's name would you want to allow people younger than age 18 to participate? I can't think of a good reason, so why even bother? I feel pretty much the same about people younger than 21. For those of you who are thinking about reminding me that the earlier you start putting money away for retirement the better off you'll be, let's be real here.

[Mike Preston]

Partner's kids work at the firm?

[masteff]

Mike P got in before me... To cover the owners' kids does come to mind. Small business owners will pay their kids to do odd jobs and then put the money into IRA's for them. The concept gets some coverage in articles oriented to small business tax minimizing and estate planning. Including the kids in the 401(k) would be a further extension of that shifting of income.

Outside of that scenario, I'd have to agree with you in general. My new employer doesn't have a plan and in discussions about what to do, I'm torn between 18 and 21. If we didn't have a 20-year old clerk, I'd probably go w/ 21.

[jpod]

The assumption that the children of the owners were the youngsters involved is probably a reasonable one. Given the EGTRRA changes (eliminating the 25% limit under 415 and eliminating elective deferrals from the employer deduction limit), I have to admit that this is kind of neat, provided that the kids actually work. Just throwing $$ on a W-2 as a means of getting more family money into the 401k plan and escaping Uncle Sam won't work if the kids are not actually employed.

[ak2ary]

Did you ever see what a 3% or 5% contribution to a 15 year old file clerk who makes 1000 bux does to cross tested results...especially the average benefits test? The owners kids are what kills the test...

[Mike Preston]

*IF* the plan sponsor has a general tested plan, then it is almost imperative to restructure for 410(b) purposes.

[ak2ary]

If the teenagers are the owners kids I agree

If the teenagers are NHCEs they help...alot...sometimes