Eligible Employee Opt Out of Retirement Benefits

[waid10]

May an otherwise eligible full-time employee elect out or opt out of retirement benefits in exchange for receiving a higher salary?

[Effen]

Generally not, unless it is a 401(k) plan.

That said, often times people who don't want to participate are excluded from eligiblity by the terms of the document, but you need to be very careful that they are not waiving benefits in return for higher compensation. If it can be proven that they traded benefits for compensation, the IRS will rule it to be a CODA and apply the 401(k) rules, which isn't pretty if it is a db plan.

Lots of other legal issues, so generally, no, you really shouldn't do it.

[waid10]

Generally not, unless it is a 401(k) plan.

That said, often times people who don't want to participate are excluded from eligiblity by the terms of the document, but you need to be very careful that they are not waiving benefits in return for higher compensation. If it can be proven that they traded benefits for compensation, the IRS will rule it to be a CODA and apply the 401(k) rules, which isn't pretty if it is a db plan.

Lots of other legal issues, so generally, no, you really shouldn't do it.

In this case, there is not a DB plan. But there are the following plans that they would be eligible for: 403(b), 401(k), and 457(b). The 457(b) is employee deferral only. The 403(b) is also employee deferral only, with a match on the 403(b) deferrals going into the 401(k). In addition, an employer non-elective contribution goes into the 401(k). These employees want to participate in the employee-deferral plans (403(b) and 457(b)), but just opt out of any employer money. Could they waive participation in the 401(k)?

[Kevin C]

Unless you are talking about a one time irrevocable election as defined in 1.401(k)-1(a)(3)(v), you are likely to turn the entire plan, including the employer contributions into a CODA. That means the deferrals plus all employer contributions would be subject to the 402(g) limit.

1.401(k)-1(a)(3(v)Certain one-time elections not treated as cash or deferred elections.—

A cash or deferred election does not include a one-time irrevocable election made no later than the employee's first becoming eligible under the plan or any other plan or arrangement of the employer that is described in section 219(g)(5)(A) (whether or not such other plan or arrangement has terminated), to have contributions equal to a specified amount or percentage of the employee's compensation (including no amount of compensation) made by the employer on the employee's behalf to the plan and a specified amount or percentage of the employee's compensation (including no amount of compensation) divided among all other plans or arrangements of the employer (including plans or arrangements not yet established) for the duration of the employee's employment with the employer, or in the case of a defined benefit plan to receive accruals or other benefits (including no benefits) under such plans. Thus, for example, employer contributions made pursuant to a one-time irrevocable election described in this paragraph are not treated as having been made pursuant to a cash or deferred election and are not includible in an employee's gross income by reason of §1.402(a)-1(d). In the case of an irrevocable election made on or before December 23, 1994—

(A) The election does not fail to be treated as a one-time irrevocable election under this paragraph (a)(3)(v) merely because an employee was previously eligible under another plan of the employer (whether or not such other plan has terminated); and

(B) In the case of a plan in which partners may participate, the election does not fail to be treated as a one-time irrevocable election under this paragraph (a)(3)(v) merely because the election was made after commencement of employment or after the employee's first becoming eligible under any plan of the employer, provided that the election was made before the first day of the first plan year beginning after December 31, 1988, or, if later, March 31, 1989.