Waiver of Participation in a Safe Harbor 401(k) Plan

[mming]

Perhaps I'm overly concerned that 'safe harbor' sometimes means give an allocation no matter what, but I was wondering what the consensus is on the following: If a plan uses the 3% QNEC safe harbor design, would the sponsor still be obligated to provide it to a participant who would prefer to waive their participation in the plan when they become eligible?

Also, I know that catch-up contributions can be in addition to the 402(g) limit and the dollar limit on annual additions, but could they also be in addition to the 100% of compensation limit on annual additions (e.g., when a profit sharing contribution added to a participant's deferrals exceed 100% of their compensation?

Thanks in advance for all help.

[austin3515]

1) If waiver is obtained, then no 3%. HOWEVER, that person is not excludable for coverage, so hopefully you can still pass even without that individual. I've always wondered what would happen in an owner/one/two employee company when one employee opts out. I suppose that owner is basically barred from having a plan?? NEver run into it, fortunately, but I have come close.

2) Yes, she can exceed 100% of pay by up to 415© limit, HOWEVER, obviously, their total 401(k) contributions cannot exceed 100% of pay, since they are, after all, payroll deductions.

[mming]

Thanks Austin for the speedy reply. I assume 'coverage' refers to the % of nhce's benefiting being at least 70% of the % of hce's benefiting. This is a great point you bring up because it's a small employer and it looks like it'll be a problem. They have one hce and 4 nhce's, of which 3 may waive participation. The 3 want to waive because they're maxing out in a 401k plan at another company where they work. You only get one 415©/402(g) limit per year no matter how many different employers' 401k plans you participate in, right? I suppose using a safe harbor match design in this plan instead of the 3% QNEC design would avoid their need to waive participation while still being included in the coverage test as long as they don't defer anything.

[austin3515]

1) Electing not to make 401(k) contributions does not equal waiving participation. Your question was worded as though they were opting to irrevocably waive participation (you had mentioned before eligiblity, etc., which is a requirement to irrevocably waive). Simply electing not to make 401(k) does not create a coverage problem.

2) As long as the two employers are unrelated, then there is no combination for 415. The limit is applied separately for each plan. An individual is limited (on their 1040, etc.) to $15,500 so they certainly need to ensure that a consolidated basis this limit is not exceeded. However, they do need to modify their elections in each plan accordinly.

So unless they hate the idea of free money (which I have seen happen) then they should just elect to make no 401(k) contributions, and do not irrevocably opt out of the Plan.

And this way, everyone is happy.

Side Note: From a plan design perspective, the safe harbor match does appear to be an appealling alternative for the employer, but without knowing more about the goals, I couldn't say...

[Bill Presson]

The 3 want to waive because they're maxing out in a 401k plan at another company where they work. You only get one 415©/402(g) limit per year no matter how many different employers' 401k plans you participate in, right?

austin is right. You get one 402(g) limit, but not one 415© limit if the employers are unrelated. They don't have to waive anything. Just don't defer.

[mming]

Thanks for the input, everyone.

It seems like a pretty sweet deal that you can be allocated over 100% of comp. (assuming neither the annual deferral nor the $ limit has been surpassed). THERE OUGHTA BE A LAW! Is this true whether or not catch-up contributions are involved?

[Kimberly S]

Catch up contributions are the only amounts that can exceed compensation and still be within the 415 limits.