Negative elections for current employees?

[Wessex]

Does anyone have any thoughts (or even better, IRS input!) as to whether "negative elections" under a 401(k) plan could be implemented, say effective as of the first day of the next plan year, for current employees who have not elected to defer as well as for newly hired employees?

I am inclined to say no, because those employees have, in effect, already made a “negative election” not to participate. The IRS guidance, of course, only discusses “negative elections” for new employees.

[LCARUSI]

Sorry WESSEX, no IRS input, but here are some thoughts...

I don't see why you can't do it (implement negative elections for an ongoing plan).

I would send a contribution change to each eligible employee who is below the intended default contribution rate (x%). I would instruct the employee to complete the form (paper or electronic) and submit it with any contribution rate including 0%. The instructions will also indicate that the participant's rate will be changed to x% if he/she does not submit a form.

You will want to have proof that each employee actually received the form. You'll also want to give employees sufficient time to return the form.

Your next problem will be to deal with employees who claim either:

-they never received the letter, or

-they responded and you never processed their response for a lower contribution rate than 0%

However, I assume these are standard problems in any plan with negative elections.

[This message has been edited by LCARUSI (edited 11-23-98).]

[Guest PWBAer]

We had client adopt negative elections almost 2 years ago for anyone at 0% deferral, and newly eligible. Two notices beforehand which included enrollment forms were issued with each notice to existing eligible employees. Two complaints from participants out of possible 400. Enrollment is currently at 93%.

[kboyce]

Be careful with respect to certain state laws. Arizona and some other states require an empoyee must acknowledge in writing any reduction in pay. The negative election have been implement by adding the required disclosure to the SPD or employee handbook & require the employee to sign an acknowledgement receipt.

[Guest bswift]

We just received IRS approval for a negative election covering existing employees not participating in the plan for a national employer. So long as sufficient notice and disclosure is given the IRS won't have a problem. Re kboyce's comments on state law requirements, that is a little tricky (because being from Arizona wer're familiar with those state laws) and there are a couple of things you can do. Either obtain employee's consent or take the position that ERISA preempts those state laws. I think the preemption argument is a good one in this context. Good luck.

[Wessex]

Thanks B. Swift for the good news.

[This message has been edited by Wessex (edited 12-14-98).]

[Guest kp]

Any comments on the 404© issues relating to negative 401(k) elections? Generally, a plan's fiduciaries are not liable for losses or breaches of fiduciary duty that result from the participant's or beneficiary's investment decisions. In the negative election, the participant may not make an affirmative investment decision. I would imagine the sponsor could have the participant default into a safe investment like a money market. Any experiences?

[Guest bswift]

kp - the 404© issue is one that you have to grin and bear as a trade off on the negative election. In other words, I don't think that you can get around the fact that you'll have to decide in which fund the money is invested absent an affirmative election by the parrticipant. That was one of the issues we raised with client re negative election and they decided to invest the money in some sort of bond fund that historically offered better than money market rates but less volatility than equity funds. Hope that helps.

[Guest lame]

Does anyone have any sample language for a notice to employees of the negative election

enrollment? Also, does the negative election have to be in the plan document?

[Guest bswift]

I do have sample notices for negative elections and yes the IRS will require that the negative election be in the document.

[Guest lovlee]

removed as entered in the wrong discussion area.

[This message has been edited by lovlee (edited 01-19-99).]