Change amount of deferrals.

[Guest Michael Spaid]

How often must a 401(k) participant be allowed to change the amount of (or discontinue) their deferrals? If a plan is only valued once a year and has only one entry date (first day of plan year nearest completion of requirements), can the plan only allow participants to change their elections or discontinue deferring as of the first day of the plan year?

------------------

Michael Spaid

[LCARUSI]

Yes, the Plan can limit rate changes to once per year - but it would be a foolish thing to do.

It would be a disincentive for nonhighly compensated employees to contribute if they fear they cannot suspend contributions if they get nto fianncial difficulty.

And it shouldn't be a problem for the employer to allow more frequent changes. Many employers allow quarterly rate changes, but also allow employees to completely suspend contributions at any time.

MOst employees don't change their contribution rates.

[MWeddell]

I ran into an even more extreme situation last week. While performing due diligence for a client's proposed acquisition, I came across a plan for union employees that didn't allow any contribution percentage election changes or suspensions during a 3-year period (that ended when the collective bargaining agreement expired). I was suspicious that allowing no suspensions might be illegal, but after 1-2 hours of research I couldn't find any law or regulation that was violated.

Somewhat reluctantly, I concluded that there's no restriction on how infrequently deferral elections may be changed or suspended as long as one doesn't accidentally meet the conditions for the one-time irrevocable election rule that takes one completely out of the 401(k) regulations. If anyone identifies a legal restriction, I'd appreciate hearing about it.