Can an eligible employee opt out of a 403(b) plan

[katieinny]

A newly hired employee would like to opt out of the ER's 403(b) plan. Not only does he choose not to defer, but he'd rather receive more compensation than an ER contribution to the plan. I know that under a regular DC plan, the ER would have to adopt a volume submitter or individually designed plan to allow this, but 403(b)s aren't available as prototypes and don't have the same submission process -- at least not yet. I tried the 403(b) Answer Book, but couldn't find anything.

[QDROphile]

403(b) plans can be designed to allow one-time irrevocable elections, but it sounds too late to accommodate this employee, and such a design change would probably be unaccepatble to the employer. I am inferring a lot about the employer contribution because the description is sketchy.

[katieinny]

So, you're saying that if the employee is already eligible for an employer contribution, it's too late to waive. If he hasn't met the eligibility requirements, there's still time. Are you thinking that the employer might object to allowing a waiver because it could start a trend among new hires, or because of testing -- or both?

[QDROphile]

A one-time election feature fundamentally changes the plan design unless the election is narrowly circumscribed. Even then, it could lead to discrimination problems depending on the choices. Also, substituting current compensation for contributions might increase employment taxes, but I could be recalling the rules about 403(b) contributions incorrectly. I did not check and there is a specific rule.

[Kevin C]

If the participant is eligible to defer in the 403(b), then it is too late to make a one-time irrevocable election. See 1.401(k)-1(a)(3)(V). The preamble to the final regs says:

These final regulations also clarify the rules relating to one-time irrevocable elections that are not treated as cash or deferred elections. First, the final regulations replace the requirement that the election be made upon commencement of employment or first becoming eligible under the plan or any plan of the employer with the requirement that the election be made no later than first becoming eligible under the plan or any other plan of the employer. Second, the final regulations define any other plan of the employer for this purpose to mean any plan or arrangement that is described in section 219(g)(5)(D), which includes a section 457(b) governmental plan and a section 403(b) plan, as well as a qualified plan.

Note: There is a typo in this preamble section. The preamble section refers to 219(g)(5)(D), but the regulation refers to 219(g)(5)(A). The reference to 403(b) is in 219(g)(5)(A)(iv).

QDRO, wouldn't a one-time irrevocable election in a 403(b) cause a problem with the universal availability requirement?

[J Simmons]

Interesting question about the impact of a one-time, irrevocable election on the universal availability requirement. Does the availability to all to have made that individual election out satisfy it? Does making that election upfront have a continuing effect so that universal availability is always satisfied with regards to the employee who elected out? Or, since he no longer has the option to make elective deferrals thereafter, is the universal availability defeated because the plan cannot at later times allow him to make elective deferrals? Given the mention in the 403b regs preamble, and not specifying that such are incompatible with the universal availability requirement, I would think that the IRS view is that the two are compatible.

BTW, I've had a situation where we drummed it into the head of a new employee before he signed a one-time, irrevocable election that he could not thereafter change it. The election was titled: "One-Time, Irrevocable Election." He signed. Before the first year of employment was completed, he protested that he ought to be able to change that election despite being a highly educated individual with demonstrated proficiency in English, his native language.

[Kevin C]

The preamble quote came from the final 401(k)/401(m) regulations. I can't find any mention of a one-time irrevocable election in the 403(b) regulations preamble.

I'm reading the one-time irrevocable election rules to say the election applies to all current and future plans and arrangements sponsored by the employer. I don't see anything in the universal availability rules that gives an exception for someone who has made a one-time irrevocable election.