Withdrawal of Default Elective Deferals

[RCK]

We have a 401(k) Plan with a PPA Safe Harbor, and therefore automatic enrollment. So after they meet the eligibility requirements, the participant has roughly 30 days to opt out or they are automatically enrolled at 3%. After that, we give them 30 days to ask for a refund of those contributions.

Lets say that they don't opt out, and the deduction is taken from their checks.

They quit and 6 months later are rehired. Since they have not made an affirmative election to contribute or not to contribute, we auto enroll them again.

The question is whether we can allow them to withdraw those contributions if they request that refund within 30 days of the first payday of the second period of employment, because the regulation says:

A covered employee's election to withdraw default elective contributions must be made no later than 90 days after the date of the first default elective contribution under the eligible automatic contribution arrangement and must be effective no later than the date set forth in paragraph ©(2)(iii) of this section.

Since this request is about 200 days after the first default elective employee contribution, we're thinking they can't have a refund after the second auto enrollment.

Writing all this up got me thinking of a second question. Lets say that the participant askes for a refund of the contribution from the FIRST period of employment. Does this constitute an afirmative election not to contribute?

[Guest Sieve]

The initial automatic deferral is just that--the participant's first under the plan. But, you can treat a person who has not deferred for a year as beginining anew thereafter, and therefore the first automatic deferal after that one-year-plus period is treated as an intitial deferral which can be withdrawn:

"For purposes of determining the date of the first default elective contribution under the eligible automatic contribution arrangement, a plan is permitted to treat an employee who for an entire plan year did not have default elective contributions made under the eligible automatic contribution arrangement as if the employee had not had such contributions for any prior plan year as well." (Treas. Reg. Section 1.414(w)-1©(2)(iv)(A).)

So, 200 days isn't enough to allow withdrawal of the 1st automatic deferral the 2nd time around. And, I don't think termination of employment (rather than merely non-participation while employed) changes the answer (since the regs don't say that the 1-year period of non-participation must be while an employee).

I think your final question is really 2 questions:

1. When an individual is rehired, do we use the same election made during the first employment period, or do we require a new one? We've often had the discussion on this Board of whether you treat a rehired employee's prior deferral election as still in place when an individual is rehired. I say no, but it would be an easier question to answer if the election form specifically indicates how it will be treated upon rehire.
   
2. If the answer to the 1st question is that you can use the prior election upon rehire, then is the prior request for withdrawal of the initial automatic deferral considered to be an election to defer 0%? While the preamble to the EACA final regs indicates that a withdrawal of automatic deferrals cannot restrict the ability of the employee to defer again within the 90-day period, there is nothing wrong with indicating in the withdrawal application that the deferral is being reduced to 0% immediately and will remain there until elected otherwise in another salaray deferral election form. So, if question #1 is answered "Yes", then I think question #2 can also be answered "Yes" (if the withdrawal form indicated a 0% deferral going forward, or, I guess, if it was treated administratively as implying a 0% deferral going forward).