Rehired After Opting Out vs. Definition of Participant

[Guest Erin W]

I have a client who is obsessed with "employment agreements", several of which include a stipulation that the employee will elect out of the 401(k) plan. There is one particular employee who was hired in May 2006 and elected out of the plan. At the end of 2008, the employee terminated employment. He was then rehired on April 1, 2009. At this point the employee will not be electing out of participation. Can he do this? If so, the next big question is the entry date. The plan dictates that any former participant shall become a participant as of the rehire date. Is this employee considered a former participant because he was eligible to be? Was he considered a non-benefitting participant? AND if he wasn't a participant, can they use his prior service to satisfy the eligibility requirements??

[QDROphile]

What do you mean by "electing out"? Is the election a one-time irrevocable election? If so, it probably carries through rehire. Any plan that uses one-time irrevocable elections is so sophisticated that it or its advisers already know all the answers to the questions you are posing.

Does "electing out" mean that the idividual elects zero deferrals because the individual has agreed to the zero election in the contract?

Does "electing out" mean that the terms of the original employment agreement make the individual ineligible for the plan and the new employment agreement puts the individual in an eligible class?

[Guest Erin W]

Yes, by "electing out" I mean irrevocably electing out of the plan, not just deferring $0. The original employment agreement required that the employee not participate in the plan (in any way, shape, or form) but the new employment agreement will permit his participation.

Regarding rehires, the plan states that former participants are immediately participants once they are rehired. I guess my main concern is whether or not this employee was considered a participant, despite his election to literally opt out. The document also says that if a participant has satisified the plan eligibility but was ineligible for the plan based on classification and then moves into a permissible class, he enters the plan as of that date. He wasn't ineligible due to being part of an excludable class, but instead because he chose/was forced to not participate. I guess the same rule would apply?

[david rigby]

One wonders if this plan passes 410(b).

[Guest Erin W]

It easily passes the average benefits test as there are only two HCEs, both older, with many younger participants who are (generously) benefitting.

[austin3515]

Since the election is IRREVOCABLE, I can't see how it can be revoked (ha ha ha)...

Interesting not so side note. I went to our new Corbel EGTRRA document which states "An Employee is not permitted to elect not to participate in this Plan." It goes on to discuss how to handle employees who had previously elected out of the Plan before this restatement.

Probably one too many plans failing coverage due to someone refusing free money!

[austin3515]

The other thing that bothers me is that, as a condition of employment, you are forcing someone to waive out a plan. Maybe it is legal, I don't know, but it just doesn't sound right... Almost like coercion...

[Guest Erin W]

Since the election is IRREVOCABLE, I can't see how it can be revoked (ha ha ha)...

Interesting not so side note. I went to our new Corbel EGTRRA document which states "An Employee is not permitted to elect not to participate in this Plan." It goes on to discuss how to handle employees who had previously elected out of the Plan before this restatement.

Probably one too many plans failing coverage due to someone refusing free money!

That's odd as my new Corbel EGTRRA document states "An Employee may, subject to the pproval of the Employer, elect voluntarily not to participate in every Qualified Plan maintained by the Employer..." and then goes on to explain the ramifications it has on various testings.

[austin3515]

That is interesitng... The first sentence of 3.6 of my BPD says: "An Employee is not permitted to elect not to Participate in the Plan." It then goes on to talk about people who made elections before the effective date of this restatement. Are you looking at the prototype or the Volume Submitter, or maybe the IDP? I'm looking at the prototype.

Are you sure yours doesn't say that? Seems very odd that we would have two different versions of this paragraph. I submitted an incident corbel last night to see what was up with this new provision.

[Kevin C]

If the original irrevocable election complies with 1.401(k)-1(a)(3)(v), I don't see how this employee could enter the plan now.

Your comment about the owner being older and numerous younger employees makes me wonder if this is a cross tested plan. I also wonder if the employees with employment contracts that require them to irrevocably elect to not participate happen to be older employees.

[Guest Erin W]

That is interesitng... The first sentence of 3.6 of my BPD says: "An Employee is not permitted to elect not to Participate in the Plan." It then goes on to talk about people who made elections before the effective date of this restatement. Are you looking at the prototype or the Volume Submitter, or maybe the IDP? I'm looking at the prototype.

Are you sure yours doesn't say that? Seems very odd that we would have two different versions of this paragraph. I submitted an incident corbel last night to see what was up with this new provision.

Okay, mine is a Corbel Volume Submitter document. In fact, section 3.6 of the plan document refers to "owner-employee limitations". The section regarding the opt-out provision in the Volume Submitter document is section 3.5 and does spell out when an employee must make the election and how it affects testing.

[Guest Erin W]

If the original irrevocable election complies with 1.401(k)-1(a)(3)(v), I don't see how this employee could enter the plan now.

Your comment about the owner being older and numerous younger employees makes me wonder if this is a cross tested plan. I also wonder if the employees with employment contracts that require them to irrevocably elect to not participate happen to be older employees.

I guess the important part of that Regulation says "during the duration of the employee's employment with the employer". So does that mean forever and ever, regardless of (perhaps) 10 breaks in service? Or does the employee's employment with the employer cease upon his termination?

Regarding the plan, it is an interesting situation as the "employer" is actually a conglomerate of native corporations so there is no owner and there has never really been a reason to keep the cost down. They originally had a SEP so when they moved to a 401(k) they wanted to keep the 15% contribution so they have the basic SH match and do an 11% PS contribution. That, combined with the fact that there are only 2 HCEs and about 10 NHCEs makes passing the testing pretty easy.

[Kevin C]

If irrevocable stopped applying after termination and rehire, the provision wouldn't have much effect. I read irrevocable as forever. Upon rehire, he is employed by the employer again.

[Guest Sieve]

I think this election change--i.e., non-irrevocability of the initial opt-out--is ok by law, but will depend on the administrator's interpretation of "irrevocable" in the plan document. (To my mind, however, irrevocable means irrevocable.)

The reg mentioned earlier--Treas. Reg. Section 1.401(k)-1(a)(3)(v)--really describes whether an amount deferred (or not deferred) under a one-time irrevocable election is includable in income. It concludes that a one-time irrevocable employee election for the employer to put X% of the employee's compensation into, say, a PSP for that employee--or an irrevocable election to have nothing put into a PSP by the employer--does not cause an amount contributed to a PSP by the employer (or an amount "made available", even if not contributed) to be taxable to the employee, even if the plan is not a 401(k) plan (which is an exception to the normal income includability rule found in 1.402(a)-1(d)(1)). In other words, the mere availability of an employee election normally is a taxable event, but not when it is a one-time irrevocable election to defer and not when it is part of a 401(k) deferral election. The same one-time election exception rule is repeated in Treas. Reg. Section 1.402(a)-1(d)(2)(iii).

On the other hand, if the one-time election in a PSP is not irrevocable then the amounts deferred might be includable in income. That could be important, but it is not important where, as here, you already have a 401(k) plan--the amount simply is not includable in income because it's a 401(k) plan deferral election (see Treas. Reg. Section 1.402(a)-1(d)(2)(i)).

By the way, the one-time election exception, as described in the 1.401(k)-1 reg cited above, must be made "no later than the employee's first becoming eligible . . ." (emphasis added). I would suggest that you can only be "first" eligible one time--at rehire, you are not "first" eligible. But, again, that ought to make no difference here, because the deferral, whether irrevocable or not, is a true 401(k) employee deferral. But, if this were a mere PSP that allowed an individual, at rehire, to change the election, it would not then be an irrevocable election, and therefore the amounts contributed to the plan by the employer pursuant to the employee election would be taxable to the employee.

So, if the 401(k) plan permits (and the plan does not have to interpret "irrevocable" as these taxability regs do), the irrevocable election could be changed at rehire (since it has no impact on the excludability of true 401(k) deferrals). I think what we have here is a "follow-the-plan-provisions" issue (which depends on the plan's definition of "irrevocable").

I do wonder, though, about 1.401(k)(f)(6)--i.e., whether, as someone suggested earlier, there is a benefit (employment? salary?) conditioned upon making or not making a deferral. If so, I think therein lies the problem.