Excluding older employee

[MoShawn]

I have a client that is asking why an older employee (85) is still receiving a profit sharing contribution when he "closed out his participation in the plan". (He was fully distributed, not terminated.) The plan is top heavy and crosstested, so the employee receives the greater of the top heavy minimum or the gateway.

Client now wants to exclude him from the plan. My only concern is that he is 85 years old. He (the employee) has stated that he doesn't want to receive any further contributions. In the event that there were a DOL or IRS audit, what are the chances that this would become an issue if the employee is the one saying he wants out? (Plan passes coverage/non-discrimination easily without him.)

[JanetM]

You can make an irrevocable election to not participant initially but I don't know if you can you it after you have begun to participate. You must make the contributions or else you have operational failure. Why is being 85 a concern? If he is employee not owner he isn't required to take RMD.

If he really doesn't want the money tell him to donate it to charity.

[Guest mjb]

I have a client that is asking why an older employee (85) is still receiving a profit sharing contribution when he "closed out his participation in the plan". (He was fully distributed, not terminated.) The plan is top heavy and crosstested, so the employee receives the greater of the top heavy minimum or the gateway.

Client now wants to exclude him from the plan. My only concern is that he is 85 years old. He (the employee) has stated that he doesn't want to receive any further contributions. In the event that there were a DOL or IRS audit, what are the chances that this would become an issue if the employee is the one saying he wants out? (Plan passes coverage/non-discrimination easily without him.)

Under IRC, ERISA and ADEA employee can not be excluded on account of age.

[david rigby]

HCE?

[Guest Kabert]

I assume the plan terms also provide that he's eligible, as an employee, under the plan. If you and the employee really want to do this though, one thing you might consider is amending the plan's definition of "ineligible employees" (or similar rule in the eligibility rqmts) to provide that employees who make a written, notarized, and voluntary election not to participate in the plan are also "ineligible." Then, write something up and have the employee sign it and get it notarized.

[MoShawn]

JanetM: My concern is, as mjb stated, that IRS/DOL could come back and cry age discrimination. However, this is being requested BY THE EMPLOYEE. (This is not an IRA, Roth IRA, SEP or SIMPLE, so I think the charitable distribution is out.)

david: No, he is not HCE.

Kabert: This is what I'm leaning toward at this point. Amending to make this employee excluded (or ineligible for any further contributions) and having both him and the employer sign something stating specifically that this is being done for no other reason than the employee's request.

Does anyone see a problem in proceeding this way? (Personally, I'm having a hard time figuring out why this employee wants to opt out of free money.)

[JanetM]

Tell him to name a charitable organization as his beneficiary and then ignore the account exists. It will eventually go to the charity.

Is this person in a position to be excluded by class while not effecting others? If so, I would say you could do so prospectively. It just smells bad to have him opt out by signing waiver after he has been a participant.

[GMK]

It may just be my overactive imagination, but I would be concerned about whether the age advantaged employee's continuing employment depends on opting out of the plan.

According to the OP, the client wants the employee excluded from the plan. And it will take an amendment to accomplish this. Is it really a voluntary opt out? And what's the "or else" (if the employee can't be excluded)?

[Kevin C]

An irrevocable election is out because he was already a participant in a plan of the employer. see 1.401(k)-1(a)(3)(v).

You should consult an ERISA attorney before letting the employee opt out of the plan. Rational people don't give up free money without getting something of value in exchange. That sounds a lot like a CODA. The participant's election would not satisfy the one-time irrevocable election exemption in 1.401(k)-1(a)(3)(v) since he is currently in the PS plan.

[Guest Sieve]

Opt-out will not work at this point, even if voluntary, for reasons stated earlier by others.

So, I'd either exclude him by job category (if possible), as Janet suggested, or reduce his compensation to the extent of his allocation and then let him take a distribution of the amount contributed. (I assume in-service distributions are are allowed--probaby after a certain age--because you said he'd taken distributions of all assets previously.)

[Guest mjb]

Opt-out will not work at this point, even if voluntary, for reasons stated earlier by others.

So, I'd either exclude him by job category (if possible), as Janet suggested, or reduce his compensation to the extent of his allocation and then let him take a distribution of the amount contributed. (I assume in-service distributions are are allowed--probaby after a certain age--because you said he'd taken distributions of all assets previously.)

How do you avoid violating federal and state age discrimination laws if you reduce his compensation to equal the amount of the allocation? Also would't excluding him by a job category be a suspect classification under ADEA (disparate impact) if he is the only employee in the group?

[Guest Sieve]

I have no idea if excluding a job category in which an 85-year old is the only employee is an ADEA violation or a suspect classification for ADEA purposes. If so, then I guess using that approach to exclude a willingly-excludable employee will have some built-in risks for the employer.

Reducing the employee's compensation would be based on the employee not wanting (for whatever reason) to participate in the plan and therefore an understanding with him: i.e., we have to make a contribution for you--we have no choice under ERISA (or ADEA?)--and you don't want to participate, so we will reduce your compensation on a go-forward basis (& perhaps you want to reduce your hours anyway), and then you can turn around and take our contribution for you out of the plan, so therefore we will consider the contribution part of your overall compensation.

Another approach might be to put him and others in a 0% category and turn the plan into a new comp. PSP. That certainly would work. Each employee could even be in a separate category. Higher administrative fees, but a workabe solution.

What suggestions do you have to solve this situation, mjb? Or, do you think the employer has no options at all?

[Guest mjb]

I have no idea if excluding a job category in which an 85-year old is the only employee is an ADEA violation or a suspect classification for ADEA purposes. If so, then I guess using that approach to exclude a willingly-excludable employee will have some built-in risks for the employer.

Reducing the employee's compensation would be based on the employee not wanting (for whatever reason) to participate in the plan and therefore an understanding with him: i.e., we have to make a contribution for you--we have no choice under ERISA (or ADEA?)--and you don't want to participate, so we will reduce your compensation on a go-forward basis (& perhaps you want to reduce your hours anyway), and then you can turn around and take our contribution for you out of the plan, so therefore we will consider the contribution part of your overall compensation.

Another approach might be to put him and others in a 0% category and turn the plan into a new comp. PSP. That certainly would work. Each employee could even be in a separate category. Higher administrative fees, but a workabe solution.

What suggestions do you have to solve this situation, mjb? Or, do you think the employer has no options at all?

IRC 411(b)(2)(A), ERISA 204(b)(2)(A) and ADEA 623(i)(1)(B) all provide that a defined contribution plan satisfies the requirements for benefit accrual, if under the plan, allocations to the employee's account are not ceased and the rate at which amounts are allocated to the employee's account is not reduced because of the attainment of any age.

ADEA 623(a)(3) "It shall be unlawful for an employer to reduce the wage rate of any employee to comply with this act."

Do you see any options?

[Guest Sieve]

We aren't reducing or eliminating anything "because of the attainment of any age". That's a given from the OP.

I've given options. You've dismissed them all either specifically or by your silence. I therefore assume, since you threw my question right back at me without any of your own solutions, that you believe there are no options at all. So, we'll just let the questioner go with what the thread has so far produced.

[Guest mjb]

We aren't reducing or eliminating anything "because of the attainment of any age". That's a given from the OP.

I've given options. You've dismissed them all either specifically or by your silence. I therefore assume, since you threw my question right back at me without any of your own solutions, that you believe there are no options at all. So, we'll just let the questioner go with what the thread has so far produced.

Then why is the employer reducing the contributions for an 85 year employee if not on account of age?

Is the employer reducing or eliminating contributions for employees who have not attained age 40?

How can employee's benefits under the PSP plan be reduced without violating disparate treatment or disparate impact under ADEA?

[Guest Sieve]

The employer is reducing the contribution to the plan on account of the participant's request and desire. Plan & simple. I really don't care what his reason is.

Why can't the request of an older employee be accomodated, even if the action, taken without the individual's request, would violate the rules? So, you're saying that I can't reduce an older employee's requested move to a position with less pay and less responsibility even if the individual requests it? What if the request is because the employee can no longer keep up with the workload and responsibility and activity required? If that's so, and disparate treatment can be found even resulting from a requested action initiated by the employee and accomodated by the employer, then ADEA is wrong!! I guess it would be better that I fire him, ehh??

But this isn't an ADEA board, and I'm not an ADEA attorney. 'nough said.

[Guest mjb]

The employer is reducing the contribution to the plan on account of the participant's request and desire. Plan & simple. I really don't care what his reason is.

Why can't the request of an older employee be accomodated, even if the action, taken without the individual's request, would violate the rules? So, you're saying that I can't reduce an older employee's requested move to a position with less pay and less responsibility even if the individual requests it? What if the request is because the employee can no longer keep up with the workload and responsibility and activity required? If that's so, and disparate treatment can be found even resulting from a requested action initiated by the employee and accomodated by the employer, then ADEA is wrong!! I guess it would be better that I fire him, ehh??

But this isn't an ADEA board, and I'm not an ADEA attorney. 'nough said

As an attorney you need to know how the ADEA effects employee benefits if you are going to advise clients on their benefit plans. Under retirement plans subject to ERISA all employees are protected from age discrimination regardless of age.

If an employer could violate the ADEA because of an employee's request to be accomodated how would employees be protected from age discrimination (You either agree not to participate in the plan or you be fired)? Employer can only be protected from violating the ADEA if the employee signs a valid waiver that meets the requirements of Section 626(f)(1).

ADEA section 626(f)(1)(D) allows an employee to waive his rights under the ADEA to pay and benefits as of the date the waiver is signed only if he receives some consideration in addition to anything of value to which he is already entitled to. What would that additional consideration be if his pay and benefits are being reduced?

What makes you think the employee would not file a claim of age discrimination on the grounds of coercion after accepting a lower paying position?

Of course you can fire him for inability to perform if it has been documented in the employee's performance reviews but ADEA counsel will recommend that you get a waiver that meets the requirements of 626(f)(1).

[Guest Sieve]

So, then, if the cost is for the employee to sign a waiver and receive some extra consideration, then that's still a viable suggestion. Between your ADEA expertise and my suggested solutions, we could really help clients, ehh? (By the way, nothing makes me think that an ADEA claim could not be filed when moving Mr. Geezer to a lower-paying position. But that's not my call--it's the client's, with proper disclosure and full consideration of the same risks that the employer is taking every single day.)

Frankly, if a client had come to me with the OP issue, I'd have suggested either doing nothing or adopting a new comp. formula with others in a 0% category with Mr. Geezer--then, of course, I'd have sent the client to you for ADEA guidance or called you for guidance myself. But this OP can do what he/she wants with the info gathered here--hopefully seek professional advice apart from this Board.

I don't know about you, but I see this board as an opportunity to toss these things around--I don't view it as being intended as a place where those in the know (whoever they are) preach to those not in the know and inform the uninformed. Yes, the uninformed do get informed--and we're all uninformed on some issues--but, also, serious discussions among those who disagree are always informative and helpful, and that's the reason I come to this Board: not to get the "right" answer, whatever that is, or to convince the unconvinceable, but to hear (& give) other viewpoints that I (or others) may not have considered. Your posts have certainly been helpful to the OP and to me (and maybe even to others)--as, I hope, have mine to someone (although, of course, yours generally have an edge to them that mine rarely do . . . ). In any event, you and I have helped this Board create the proper environment for those who visit here.

Now, doesn't that make you feel good . . .?

[J Simmons]

I have a client that is asking why an older employee (85) is still receiving a profit sharing contribution when he "closed out his participation in the plan". (He was fully distributed, not terminated.) The plan is top heavy and crosstested, so the employee receives the greater of the top heavy minimum or the gateway.

Client now wants to exclude him from the plan. My only concern is that he is 85 years old. He (the employee) has stated that he doesn't want to receive any further contributions. In the event that there were a DOL or IRS audit, what are the chances that this would become an issue if the employee is the one saying he wants out? (Plan passes coverage/non-discrimination easily without him.)

Has this ER ever accommodated a younger EE's request to be excluded from the plan (other than a Treas Reg § 1.401(k)-1(a)(3)(v) opt out)? particularly an EE under 40? If so, would it not be ADEA discrimination to deny the 85 year old EE the same option the ER has perhaps given a younger one, particularly one under age 40?

[GBurns]

My 2 cents worth

I am concerned that this issue is being driven by the employer (client) since the OP did state " I have a client that is asking why " and " Client now wants to exclude him from the plan " .

I suspect that there is the possibility of coercion of the employee. I doubt that anyone would voluntarily give up "free" money to which they are entitled.

IMHO, this is an employer who is trying to find an easy way to deny a benefit to an employee.

I would tell him tough luck and advise legal counsel, on the various issues raised, if he wants to proceed.

This thread has had many good suggestions but I think that I am seeing over-reactions to writing style. Let's stick to the message and leave the messenger's style out of it. I doubt that many of us write prose for a living.

[K2retire]

I suspect that there is the possibility of coercion of the employee. I doubt that anyone would voluntarily give up "free" money to which they are entitled.

IMHO, this is an employer who is trying to find an easy way to deny a benefit to an employee.

I believe you've just identified the exact concern that an IRS or DOL auditor would raise about this situation. Regardless of the facts, the appearance of coercion will be hard to overcome.

[masteff]

I'm amazed that people can take issue w/ my liberalness on hardship withdrawals and then conceive to exclude someone based on age in direct violation of the law and regs (see Code Section 410(a)(2)and Reg Section 1.410(a)-4(a) ).

Only possiblity is to find a non-age factor on which the employee can be excluded. These would be things like, covered by a CBA, leased employees, part-time employees, and employees covered by another plan of the employer.

Oh, and the alternative to coercion is poorly-considered pay negotiations... "Let me keep working so I can keep my drug prescription coverage and I won't take any other benefits". "Sure, we can do that... opps, why is he still getting profit share???"

[Guest Sieve]

I agree that there are major ADEA problems if the facts are as George and others suggest they are--and, perhaps in this case we really are dealing with a bad employer acting badly.

On the other hand, FWIW, I was focusing on Post #6 where it was stated that "this is being requested BY THE EMPLOYEE" (caps in original). Rightly or wrongly, I took that at face value, and was--as masteff suggests--trying to come up with a non-age factor for excluding the employee. Apparently, however, disparate treatment was an issue in most solutions.

BTW, George, some of us in this thread do, in fact, write prose for a living.

[MoShawn]

My thanks to all who have responded.

Essentially, "Mr. Geezer" (I like that) cut back to about 600 hours per year, is sticking around just so that he isn't sitting around with nothing to do, and apparently doesn't want to be bothered with the plan any longer. The client stated that the participant brought in the quarterly statement that he received at his home to ask why he is still getting money. That is why I have no doubt that this is being requested by the participant.

This is already a new comp plan with each individual their own group for allocation purposes. The issue is that the plan is top heavy, which requires a contribution, and which in turn triggers the gateway. I was hoping for a way to exclude him to avoid all this.

[GMK]

Just off the top, wondering if you can add a 1000 hours per year requirement for future allocations, or doesn't that work here?

[MoShawn]

Just off the top, wondering if you can add a 1000 hours per year requirement for future allocations, or doesn't that work here?

I don't believe you can put an hours of service requirement on a top heavy contribution, correct?

[GMK]

Sorry. No more off the top, please.

Looks like it's best to go with masteff's non-age factor approach, if possible.

[BG5150]

Get the employee on video denouncing his ties to the plan. Just make sure the guys in masks and with the machine guns are not in frame. It may look bad. And coach him to "say" his statement, not "read" it. It's more believable that way.

[J Simmons]

BG5150,

Now I know why you hide behind that mask and masquerade in a cape. Are you posting from Guantanamo or Abu Ghraib or the mountains along the Afghani-Pakistan border? What is your definition of 'torture'?

[BG5150]

What is your definition of 'torture'?

Sometimes, trying to wade through these:

http://www.access.gpo.gov/nara/cfr/waisidx...26cfr1e_05.html

And I am not at liberty to say whence I post.

[My 'employer' disavows any knowledge of this post]

[K2retire]

[My 'employer' disavows any knowledge of this post]

Glad to hear I'm not the only one whose employer doesn't believe in the right to free speech!