Irrevocably Elect Not to Participate in the Plan

[Madison71]

Can someone explain this to me a little more in detail? If an employee irrevocably elects not to participate in the plan by signing some sort of waiver, how are they treated for nondiscrimination purposes, etc? Would they be included in an ADP Test, 410(b)? Why would someone irrevocably elect not to participate? Employer wants to give participant the option of participating in the plan or giving more money. Not sure why an employer would want to do that considering tax ramifications unless compensation increase is less than the benefit? Any insight would be greatly appreciated!

Thank you!

[Tom Poje]

first, the document must allow someone to irrevocably waive out.

in the regs one time elections are found under 1.401(k)-1(a)(3)(v)

though actually it doesn't even mean someone is making an election out of the plan, but could refer to someone making an election to contribute a set amount to the plan. Example 5 uses 5% to a money purchase - and that will be the only amount, even if the emploer adds another plan!

but regardless.

to be on the ADP test you have to be 'eligible'. if someone elects out they are not on the ADP test. same rules for the ACP test. (If you had a controlled group and you don't aggregate plans, you don't put the members of the controlled group on the test with 0 either, so nothing special there)

once the person completes the eligibility requirements, they are included and not benefitting for 401(k) coverage and 401(m) coverage and a(4) coverage. they would also show on any a(4) nondiscrim test, which is different than ADP or ACP rules.

why would someone elect out? about the only reason I can think of is because they want to put into an IRA, and if you are benefitting in a plan your IRA limit is reduced. Another possible reason is they don't want free money given to them by an employer.

[BG5150]

I had someone opt out due to a religious reason. The person was forbidden to keep money in an interest-bearing account or something like that.

[Madison71]

first, the document must allow someone to irrevocably waive out.

in the regs one time elections are found under 1.401(k)-1(a)(3)(v)

though actually it doesn't even mean someone is making an election out of the plan, but could refer to someone making an election to contribute a set amount to the plan. Example 5 uses 5% to a money purchase - and that will be the only amount, even if the emploer adds another plan!

but regardless.

to be on the ADP test you have to be 'eligible'. if someone elects out they are not on the ADP test. same rules for the ACP test. (If you had a controlled group and you don't aggregate plans, you don't put the members of the controlled group on the test with 0 either, so nothing special there)

once the person completes the eligibility requirements, they are included and not benefitting for 401(k) coverage and 401(m) coverage and a(4) coverage. they would also show on any a(4) nondiscrim test, which is different than ADP or ACP rules.

why would someone elect out? about the only reason I can think of is because they want to put into an IRA, and if you are benefitting in a plan your IRA limit is reduced. Another possible reason is they don't want free money given to them by an employer.

Thank you Tom. Plan does permit irrevocable elections. I got a bit lost (not a big surprise). So, if irrevocably elect out they are never considered eligible for ADP or ACP Test, right? They would be considered eligible not benefitting for 401(k), (m) and (a)(4) coverage. Could be an issue if enough people elect out. It is a new plan and they are going to increase compensation if elect out. Any issue with it being considered a CODA b/c the employer is increasing comp. if elect out?

THANK YOU!!!

[rcline46]

In my opinion, if the IRS checked this, and discovered the employee was bribed, yes bribed, to not be in the plan, and the especially if the ee was an NCE, the IRS or DOL would not look kindly on the employer interfering with the ERISA rights of an ee.

[Madison71]

Thanks - would be interested to know what Tom thinks. I agree with you and I'm not saying its right, but not sure how the IRS is going to discover this. If there is something clearly out there from the IRS prohibiting this, then obviously you would advise client not to do it whether IRS would discover or not.

[Tom Poje]

the very 'title' (if you will), of the particular reg cite is "Certain one-time elections not treated as a cash or deferred election". in fact that has to be the reason they are irrevocable - if you coukld switch, then you have in essence created a CODA.

you are correct, if by chance enough people elected out, you could have a problem. but again, these people do not appear on the ADP or ACP test. another similar example would be someone who is not eleigible for a match because of a last day rule or hours requirement. they don't show in the ACP test either. (This is different than someone who chooses to defer 0, and met hours/last day requirement - and the match is therefore 0.