Participant Opting out of Profit Sharing and Money Purchase Pension Pl

[LCARUSI]

Sponsor has two plans (prototype).

Employee who will soon be eligible to participate (non HCE) wants to opt out of the Plans (presumably in return for more salary).

1) Is this allowable?

2) If it is allowable, is the opt-out decision irrevocable?

3) If it is allowable, does the opt-out person count against the Sponsor in 410(B) testing?

[Guest Susan]

This is interesting, in light of ERISA Section 510 and the article in the 12/28/98 issue of Pension & Benefits Week, to which there is a link under "What's New".

[Tom Poje]

allowable to elect out (though I believe the option has to be in the document.)

it is irrevocable- it is a one-time elction.

for 410(B) ee is treated as:

includable and benefitting for 401(k)

(as if he deferred 0)

includable and benefitting for match

(if deferral =0, match = 0)

(if there is an hours requirement or last day for match and he fails, then he might be includable and not benefitting or excludable)

for 401(a) he is includable and not benefitting. If he is an HCE this can only help.

[david shipp]

It is possible for the opt-out election to be revocable without being considered a CODA. The key will be whether there is a correlation between participation and salary.

The IRS 401(k) Exam Guidelines indicate, in Definition of a CODA, that it is a facts and circumstances determination. Specifically, ". . . if there are facts and circumstances that suggest that the changes in salary have nothing to do with the elections, it may not be a CODA."

Where the opt-out election seems to lead to increasing and decreasing compensation, as in the example provided in the Guidelines, an agent would likely consider it a CODA and the only way out would be an irrevocable election. If the decision didn't directly result in changed compensation, for example an NHCE would rather have an IRA than a small pension contribution, the opt-out would not have to be irrevocable just to avoid being classified as a CODA.

From a plan administrative standpoint,however, you may not want people popping in and out on a regular basis, thus arguing for an irrevocable election.

[MWeddell]

Most prototype plans don't allow for an employee to waive participation. I do think this would have to be in the plan document.

It's permitted for profit sharing and money purchase plans, but if there's a cash or deferred arrangement, the 401(k) regulations only allow a one-time irrevocable election not to participate under fairly narrow circumstances. Furthermore, if the employee is getting higher compensation for opting out, then you're in danger of having it considered a cash or deferred election.

We've got a client who put in an opt-out provision to its profit sharing contribution because it had some very fierce anti-government sentiment among some of its employees who didn't want to profit from a federal tax break. There was no compensation increase to these employees. We didn't have any trouble amending the document and obtaining a favorable determination letter, but that client wasn't trying to use a prototype document anyway.

[KIP KRAUS]

LCARUSI:

Just an observation. If the profit sharing contribution is discretionary, thereby changing from year-to-year, or not given for some years, why would the employer want to increase his costs for one employee? If the employee gets wages instead of PS contribution, fica match goes up and any other expenses related to an employee's salarie(i.e life, STD, LTD premiums etc.).

The other thing that accures to me is that other employees similarly situated would also have the option to do the same thing, thereby defeating the purpose of the PS plan.

The employer might just as well give profit sharing checks out each year based on years of service rather than have a Plan.

It really is becoming a me-me-I society!!!

[Guest ESOPwizard]

FYI- my two cents worth: The last time I had to deal with this situation, the employee was going through a divorce and wanted the cash to hide

it from his soon to be ex.

[david rigby]

Question related to comment from Tom Poje:

If EE can opt out but is still counted for 410(B) purposes, what does this mean for the W-2? That is, as implied under David Shipp comment, and as we know, the usual reason for an opt-out is to be able to make an IRA contribution. Does an opt-out accomplish that? Does the ER complete the W-2 check-box appropriately to reflect that? Does revocability have any bearing on this issue?

Sorry for asking questions I should already know. If there is already a discussion on this, please let me know. Thanks.

[david shipp]

Reg. sec. 1.219-2 deals with "active participation" for IRA deduction purposes. Generally, you are an active participant in a DB if you are eligible (opt-out has no effect).

In a DC plan, the opt-out would effectively keep you from being an active participant and the W-2 would be completely accordingly. (Opt-out means completely, no forfeiture reallocation.)

Note that the applicable plan year to look at is the plan year ending in the employee's taxable (calendar) year.

[Guest TCAT]

Just my one cent worth. I actually have a prototype PS plan where the main HCE opts out every year to insure that the other employees receive a larger contribution!

The plan doc allows the opt out option using only a non-standard plan and any employee may opt out with a 30 day advance notice prior to the beginning of a new plan year. Best to read the plan doc.

There is still humanity in the me generation.

[Guest bswift]

tcat - notwithstanding the humanity of it all, it appears to me that the election in the profit sharing plan to opt in and out each year creates a CODA under Reg. 1.401(k)-1(a)(2) and (3) without the applicability of the one time opt out election under (3)(iv). Unless I'm missing my hand in front of my face, that's seems like a CODA.

[Guest TCAT]

bswift-excellent point. I got wrapped up in reading all the comments and thought the NHCE was HCE. Our legal advised that the real determining factor was the "smell test" and the main HCE opting out for the benefit of the rank and file would be fine. As Mr. Shipp pointed out, the election would have little to do with a change in salary for a true HCE. Again, thanks for the input.

[Tom Poje]

for a good 'reading' of 'active', see the ERISA Outline book by Sal Tripodi

definitions in Chapter 1

Active Participant for IRA purposes

-always based on calendar year basis

you are active 'only in year you actually receive a contribution...'

thus in a profit sharing plan (no 401k)

if no contributions are made, then you are not active.

to quote Sal "the employer must actually contribute to the plan on behalf of the employee for the employee to be treated as an active employee"

so if you don't defer, the employer doesn't contribute for you.

ah, so 'active' for IRA purposes is different than for 410(B)

it gets real fun. money purchase and deferrals count in the same plan year (assuming calendar year) while profit sharing since made after the end of the year count in the year MADE. I believe forf, since considered made at end of year would be considered in the plan year (not in the year you actually ran the valuation)

I think the logic is correct, if you allow someone to elect in and out every year, you have created a CODA, which is probably not what you want.

[Guest bswift]

tcat - you should have more discussions with your counsel. if it were me i'd advise you that ANY election in or out (other than a proper one time election) creates a CODA by either a HCE or NHCE. The effect is that the plan is likely disqualified because the profit sharing contributions (i) are not fully vested, (ii) don't meet the adp test, (iii) are distributable before age 591/2, (iv) etc. you might consider rechecking that issue.

[Guest D_NITSCHE]

Susan : I couln't find the link to the 12/28/98 article in Pension & Benefits Week relating to participant's waiving out of plans. Could you email me the path at eadon@msn.com ?