Irrevocable Election Out of a Plan

[austin3515]

Two companies are in an ASG - Company A and Company B. Partner 1 is a partner in both Company A and Company B (he actually owns 100% of Company B and is its sole employee). Company A sponsors a 401k Plan, and Partner 1 signed an irrevocable election out of Company A's plan. Now (years later) Partner 1 wants to establish a Plan under Company B. That's OK, because he didn't elect out of any plan ever sponsored by the ASG. But we also want Company A to adopt Company B's new Plan. The B Plan would exclude anyone covered by Company A's plan. We want to do this so we can use his comp from both Company A and Company B. Again, he did not opt out of any plan ever, just the one that Company A adopted.

Anyone have a problem with this? It sounds too easy, but it also seems perfectly legit.

[Lou S.]

If establishing a new plan so that one participant can now participate seems too easy, then yes I agree with you.

[austin3515]

Not sure I'm certain which side you fall on - yes, it's too good to be true, OR it's perfectly legit?

[rcline46]

My old documents say an Employee may elect to not participate at the approval of the Employer. So check the document in effect at the time of the original waiver. My interpretation would be that an Employer would be any member of a controlled group or affiliated service group. That would leave this gentleman out in the cold.

[Kevin C]

Are you referring to an irrevocable election under 1.401(k)-1(a)(3)(v)? Or an older election?

[austin3515]

My old documents say an Employee may elect to not participate at the approval of the Employer.

Correction: My old documents say an Employee may elect to not participate IN THE PLAN at the approval of the Employer. This is not that plan - it's a different one. I don't know what code reference - it's the portion of the plan that allowed someone to irrevocably elect out of the plan. I didn't think it was limited to 401k.

[Kevin C]

A reference in a current document to an irrevocable election to not participate will almost certainly be referring to an irrevocable election under 1.401(k)-1(a)(3)(v) because the kind of election specified in that section is deemed to not be a CODA.

(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.

The way I read it, an election to not participate that does not meet these requirements is considered to be a CODA. I haven't worked through the details of that, but I would think it is something you would want to avoid.

If the election was made under an old document under the old rules, I thought those were supposed to be dealt with when the rules changed.

[Lou S.]

Not sure I'm certain which side you fall on - yes, it's too good to be true, OR it's perfectly legit?

I agree it is perfectly legit.

I do not agree that is really that simple. But if the employer doesn't mind paying for an extra plan document and 5500, sure it is fairly simple to establish a new plan.

[austin3515]

Kevin C -

"A reference in a current document to an irrevocable election to not participate will almost certainly be referring to an irrevocable election under 1.401(k)-1(a)(3)(v) because the kind of election specified in that section is deemed to not be a CODA."

It definitely is not that. You're referring to an irrevocable election to have one's pay reduced and equal amount contributed to the plan. This would be a nonelective contribution. That's not what we're discussing here. This is an election out of the Plan entirely and is therefore unrelated.

And my irrevocable election dates back before the option was eliminated during the EGTRRA PT restatements. It probably date back 15 years or so.

[Kevin C]

The section I quoted specifically says it includes an election to receive no benefits. The only current 401(k) plan language I've seen that allows an election to not participate provides for an election that satisfies this exception.

You'll need to look at information from back when the old style election was eliminated. We didn't have any of those.

[austin3515]

My election has got to be something different than that. That paragraph seems to me to be different than opting out of the plan altogether. Your site does not deal with that at all. For example, the Plan using your elections (where the partner irrevocably elected zero in that scheme) might include a discretionary profit sharing contribution in which the partner could benefit. I have seen these provisions in plans where the participants can irrevocably elect to have a percentage withheld from their pay each pay-period forever. I think an important distinction is that the elections made in your reference are made by PARTICIPANTS. Your issues should not apply to the fella in my case, who is not a Participant because he irrevocably elected out of the Plan altogether.

Anyone else see it that way? Can anyone provide the site for my irrevocable elections? I looked in 410 but could not find it.

[PensionPro]

My recollection is that a revocable election creates a CODA so the cite is the correct one. An irrevocable election applies to all future plans of the employer. I believe it applies to related employers as well. My interpretation is that the partner in the OP elected out of all of the plans. Check the document or consult an attorney though.

[austin3515]

Can anyone point me to the regs on this?

[Bird]

The reg cited is the applicable one - it might be from "new" regs now but was first in "final" regs back in 1992. Such an election would definitely cover all future plans of the employer, and I agree with PensionPro that it would cover all employers in a CG.

Now, if you're saying that the election does not comply with the regs for some reason, then you have a CODA and any profit sharing contributions arising out of new participation are limited to the 402(g) limit, subject to testing, etc.

[Tom Poje]

one possible blurb besides the regs is found at

http://www.irs.gov/irm/part4/irm_04-072-002.html

in particular 4.72.2.5.2

this is pretty much a repeat of the regs but adds a little, such as what happens if the employee status changes.

according to the ERISA Outline Book [under the definitions] (and I am sure other sources) "If two or more organizations are treated as an affiliated service group, the organizations are treated as a single employer"

since you have 1 employer, and one time election applies to any plan of the employer including plans not yet established, well....

[austin3515]

I feel like Corbel has really let me down... I was relying on this. No reference at all to "any future plan of the employer." It seems to me they should have said "participants who elected out of any other plan of the employer are not eligible."

3.6 ELECTION NOT TO PARTICIPATE

An Employee is not permitted to elect not to participate in the Plan. Notwithstanding the preceding, in case of a non-standardized

Plan, any irrevocable elections not to participate in any component of this Plan shall remain in effect provided such elections were made

prior to the date of the adoption of this restatement. An Employee who previously made such an election not to participate under the Plan is

treated as a nonbenefiting Employee for purposes of the minimum coverage requirements under Code Section 410(b) and, if such

irrevocable election applies to Elective Deferrals, the Employee is not an eligible Participant for purposes of the Actual Deferral Percentage

test set forth in Section 12.4 or the Actual Contribution Percentage test set forth in Section 12.6.