Participation in either/or plans

[msmith]

Has anyone heard of an election a participant must make to either participate in the 401(k) or defined benefit plan? Any citation available?

[J Simmons]

No citation, but the choice will not mean that in testing each plan, you do not count those that chose the other plan. So you will create minimum coverage testing challenges right off the bat. It will probably be more a problem for the DB plan, if the EEs make wise choices. Where I've heard of this there is a 401k plan available to all for elective deferrals, but EEs only get an ER contribution to the 401k plan if they waive out of the DB plan. if the contributions by the ER to the 401k plan are set in amount that over one's career they will total about what the ER would have contributed to the DB plan, it is yet more advantages for those in the last half of their career to choose the DB plan over the 401k. Since those are higher earners, the DB plan will either immediately or over time run into a minimum coverage problem.

As a matter of ER-EE relations, I've actually heard this approach discussed as a first step towards terminating the DB plan. The ER looks good giving the EEs the choice, but then later explain to EEs that the ER must terminate the DB plan to avoid its disqualification in light of the minimum coverage failure that resulted from having given that choice to EEs. Termination is thus 'sold' to the EEs as necessary to keep the EEs from facing adverse tax consequences.

[Effen]

Be careful. If it is truly a "choice" between ER PS$ or DB accruals, you probably need to provide LOTS of information, including similarly situation employee examples or the election might not be valid.

There were some Regs released around 5 years ago and maybe they only applied if the DB was a cash balance, but you should probably give them a look.

Generally the IRS takes the position that there is no reason why anyone would waive out of a free benefit unless they were misled by their rotten stinking lying employer.

Proceed with great caution.

[John Feldt ERPA CPC QPA]

Also, would there be a fiduciary issue if, for some reason, a participant clearly picks the less valuable plan - for instance, someone who is very close to the end of their career and yet they pick the enhanced 401(k) plan. Would the fiduciary be liable for having even allowed the participant to make such a decision?