Negative Election

[Guest worr]

W/ the IRS ruling 98-30 approving Neg Election in the use of 401k plans; can the states use their power to dis-allow the use of Neg Election in a 401k?

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Wm Orr

[Greg Judd]

As I understand it, negative elections are shaping up as prime potential ERISA pre-emption battleground, since the payroll deduction is traditional state turf, & 401(k) is obviously federal ground.

Federal encouragement doesn't necessarily mean the states will love it--especially if(when) we get a good market downdraft. Regardless any precautions plans may take re: investment of automatically deducted contributions, negative elections can easily be cast in shadow when markets are off.

Trucker Huss prepared a nice brief on this issue last summer, the URL for which was posted at Benefits Link (of course). That article does delve into the pre-emption issue. The current link doesn't quite get you there, but this one may:

http://www.truckerhuss.com/0798news.html

[Guest bswift]

I don't think that the states think that the issue is all that well settled. But having said that we received approval from the irs to put in a negative election for a national employer at the beginning of this year. By the way, earlier this month, Fred Reisch in LA asked the DOL for an opinion that ERISA preempts Az, Ca, and Ny laws regarding payroll withholdings. It is unlikely that the DOL will murmer a peep, but it does tee up the issue. The legal folks at McDonalds (as is Big Mac) have had a negative election plan for a decade or so, have had challenges from various states and have managed to use the ERISA preemption shield so far. Hope that helps.

[MWeddell]

It's strikes me as odd that this issue is still open.

The Clinton administration is so clearly in favor of encouraging employers to use negative elections (a.k.a. automatic enrollments) for 401(k) plans that Pres. Clinton personally endorsed the idea in a presidential news conference. I don't know why in all the pension simplification proposals floating around Congress that someone hasn't introduced a bill stating that "the IRS is given authority to regulate the manner in which cash or deferred elections are made." All it would take is a simple statement like that in a law passed by Congress and there wouldn't be any doubt that the federal government, not the states, have exclusive authority in this area. It'd be a lot more effective at encouraging employers to adopt negative elections than a presidential news conference!

[Guest jkirschbaum]

My feeling is that a negative election is silly and paternalistic. As mentioned above - the wrong market will have people rethinking why they thought this was such a good idea.

I cannot argue that using the 401(k) is smart - but if people want to be short-sighted or not smart - that is their business. Fooling them into doing what we think is the right decision is not the way to teach people how to be responsible.

I would think that any employer that is contemplating a negative election would first consider a safe harbor plan - that is a hell of a carrot and still lets people make their own decisions.

[Kirk Maldonado]

My personal belief is that state laws that would preclude negative elections are preempted by ERISA. ERISA's preemption language is very strong and clear.

Fred Reish (of Reish & Luftman) has apparently requested an Advisory Opinion from the DOL that the laws of several states (including California, I believe) that would preclude negative elections are preempted. My prediction is that DOL will hold that the laws are preempted.

[Dave Baker]

Here's the Reish & Luftman request: http://www.benefitslink.com/reish/articles/advisoryop.html (click)

[lkpittman]

Is anyone concerned about the fact that you probably won't have ERISA 404©protection for these negative election amounts (since the ee presumably won't make an election as to where the funds will go and they will presumably go into a "default" fund chosen by the plan sponsor?)?

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LKP

[Guest bswift]

the 404© issue is one that the sponsor has to consider in determining whether to adopt the negative election approach. the employer does not have the protection of 404© for the default investment election. on the other hand, my experience is that once employees are in the 401(k) game, they start thinking more about it and usually (not always) start exercising some control over their assets. But the employer should carefully consider the default investment election.

[Guest Nancy Chagnon]

I am doing some background work on negative election and need to know what states may present challenges based on the state's statutes relative to withholding in the absence of an election from the employee. Recognizing a challenge is perhaps unlikely and that the arbiter is the DOL, I need the states for the background work. Although I can infer from Reish & Luftman's request to the DOL for an advisory opinion that Arizona, California, New York are among the states, are those the only states? Apparently Puerto Rico is also in that mix. References are made to "many states" "30 states" (I believe that was in R&L's letter to the DOL, states where R&L does business), I have heard people say that there are 5 states. But I need a definitive source for the states where this is a factor in negative election (i.e., without attempting to search 50 sets of state statutes). Can someone point me in the right direction to get - definitively - the states? Or if taken to some illogical extreme, is this a factor in any/every state - ? I appreciate the help.

[Guest Nancy Chagnon]

If anyone is still following this issue, probably very back-burner what with all that has happened over the past year, the pioneer in negative election/automatic enrollment, McDonald's, has abandonded the plan feature.

[Kirk Maldonado]

They reportedly dropped it because they went to a safe harbor plan. I generally question the wisdom of that approach, but they may have unusual facts that make it an appropriate decision.