Employee Irrevocable Election NOT to Participate - Hypothetical Questi

[Guest glhotdog]

If an Employer allows for Eligible Employees to make an Irrevocable Election not to participate in the Employer Sponsored 401(k) Plan, may the Employer disregard those Eligible Employees, making the election not to participate, from the ADP testing?

And....assuming that more than 30% of the eligible employees make the election not to participate, does this create a problem with the participation percentage requirement?

[Tom Poje]

1.401(a)(26) no longer applies to DC plans so participation % is not in question.

2. For 410(B) purposes, an employee who elcts out is treated as

a. includable and benefiting for 401(k)

b. includable and benefiting for 401(m)

c. includable and NOT benefiting for 401(a)(4), so if there is a profit sharing contribution or forfeitures you may fail.

Please be sure to make a clear distinction between Election not to participate and choosing not to defer.

Election not to participate should be a one time election, at the time first eligible. I would require a signed form of some type. That would be unusual to have so many employees choosing this option. Yes, those employees are not included in ADP testing.

But those employees can never be in another plan of the employer either.

[MWeddell]

Yes and yes.

Those who make the one time election not to participate are considered ineligible. Hence, they'll hurt you for coverage testing but won't affect ADP testing. Whether you still have to perform ADP testing depends on whether there are deferral elections besides the one-time irrevocable election.

Note that the regulations changed a few years ago so that it's more difficult to put in a plan with the one-time irrevocable election.

[MWeddell]

I was referring to Treas. Reg. 1.401(k)-1(a)(3)(iv). Rereading these posts, I'm unsure whether Tom Poje was referring to the same development.

[Dawn Hafner]

Can you direct me to the regulations that refer to this topic. How are non-selfemployed employees treated? Can an election out of the plan be made after once eligible, but prior to the plan year effective and irrevocable? Or can these only be made prior to earning eligibility? Are they always irrevocable?

[Guest ptpnthr]

Tom, I'm not so sure I agree with some of your conclusions, though I admit I have only taken a quick look at it. Section 1.410(B)-3(a)(2) of the tax regs says an employee is treated as benefiting under the plan for purposes of 410(B) if and only if the employee is an eligible employee under the plan as defined in 1.401(k)-1(g)(4) for the plan year. 1.401(k)-1(g)(4) says an employee is an eligible employee if the employee is directly or indirectly eligible to make a cash or deferred election under the plan for all or a portion of the plan year. I think it would be difficult to argue that an employee who makes an irrevocable election is in later plan years an "eligible employee." Again, I have only taken a quick look at it and there may be other guidance elsewhere, but my instincts tell me you wouldn't include such employees in the numerator but you would in the denominator for the ratio percentage test. Of course, my instincts have often been wrong.

[This message has been edited by ptpnthr (edited 02-02-2000).]

[KJohnson]

Let me make sure that I have this straight. For coverage under 410(b)individuals who have irrevocably waived out of a 401(k) Plan will be included in minimum coverage but as not benefitting. They would also be entirely excluded from the ADP and ACP tests.

Under 1.410(B)-3(a)(2) an employee will only be counted as benefiting if he or she is an "eligible employee" under 1.401(k)-1(g)(4) and 1.401(m)-1(f)4. Sections 1.401(k)(1)(g)(4)(ii) and 1.401(m)-1(f)(4)(ii) then exclude individuals who have made one time irrevocable elections from the definition of eligible employee.

Also only "eligible employees" are included in ADP and ACP tests so these employees will be completely excluded from these tests.

Finally, if there is a profit sharing contribution, only those who actually receive a contribution are counted as benefiting under 1.410(B)-3(a)(1) so these employees would be included but not benefitting under mimimum coverage for this portion of the Plan.

Right?

[Edited by KJohnson on 08-28-2000 at 07:00 PM]

[MWeddell]

That's my understanding based on Treas. Reg. 1.401(k)-1(a)(3)(iv), although the preceding thread doesn't indicate whether others agreed with my opinion. Note that there are conditions that prevent this plan design option from being implemented for an employer that already has a qualified plan.

[Guest]

I would say, who really knows?

I certainly could have learned something wrong many years ago. anyway:

I think we all agree, to be included in the ADP test you must actually be eligible.

The question is how do you handle him for coverage?

For example, if the plan excluded 'commission' employees, I would also exclude them from the ADP test. But for coverage, I would treat them as included and not benefiting - they weren't even given the chance to defer.

someone who elects out on the other hand looks like an eligible ee who says 'I elect to defer 0', and those people you do treat as includable and benefiting.'

The Erisa Outline Book says " If an employee has elected out of participation in the plan, he is not benefiting because he does not accrue a benefit. If that employee is part of the coverage testing group, an election not to participate may affect the plan's ability to meet coverage, even though the decision to elect out was made by the employee. This rule applies only with respect to employer contributions (other than elective deferrals and matching contributions) or forfeitures that are not allocated to the emplee because he elects not to particpate. See the special rules relating to section 401(k) and 401(m) arrangements where an employee can be treated as benefiting even though he chooses not to make elective deferrals or employee after tax contributions..." Chapter 8 Section III Part D #4 Election out of Plan

The problem with this section, it doesn't indicate if this is due to the one-time election, or simply a later point in time where someone elects out of the plan. But my understanding, once in a plan, you can't elect out, because you have created a CODA where a CODA might not exist. (e.g. a profit sharing plan with no deferrals.