Election to Cease Participation

[BTG]

Can a defined benefit plan permit existing participants to elect on an individual basis to cease participation in exchange for eligibility in a defined contribution plan? My gut says no, but I've not been able to find anything that would prohibit this. Note that I'm not talking about waiving any benefit which has already accrued.

I've seen this in the governmental plan context, but I'm curious if it translates into a standard qualified plan subject to ERISA.

Thoughts?

[Tom Poje]

the only rule that I know of that exists for waving out is a one time election when the person is first eligible to participate in any plan. for lack of better reasoning on my part, I believe the govt would otherwise view such an election sort of like a 'deferral election' and of course in a db plan, that is impossible. you would have to amend the plan to exclude the person by name or some other reason.

[BTG]

Tom - I certainly agree that a DB plan cannot include a CODA, and that the election described in my original post would not meet the requirements of the "one-time, irrevocable election exception" to being considered a CODA as described in Treas. Reg. Section 1.401(k)-1(a)(3)(v). However, I think the real issue is whether this election would fall within the definition of CODA in the first place. If it doesn't, then it wouldn't need to meet the exception.

Per Treas. Reg. Section 1.401(k)-1(a)(3)(i), a CODA is an election between either (1) cash or some other taxable benefit that is not currently available, or (2) a contribution to a trust or accrual under a plan deferring the receipt of compensation. In this case, neither of the two options is cash or an otherwise taxable benefit. The employee would instead be choosing between two benefits that would fall under the second alternative. As such, I'm not sure this could be considered a CODA.

Thoughts?

[Tom Poje]

I still don't see how it is possible. again, my understanding of the one time election found in the 401k regs pertains to all plans, even if not established and can only be done when first eligible, otherwise such an election would be treated as a 'deferral election'

(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.

[My 2 cents]

If it can be done, it would not be in relation to those one-time only elections to not participate (which have something, I think, to do with keeping eligibility to make IRA contributions), which do have to be made right up front.

I know that it is permissible to offer defined benefit plan participants a choice between staying on the old formula or changing to the new cash balance formula. Wouldn't stay or go to the 401(k) plan be similar to that? Don't have a cite, though.

Those choosing to participate in the 401(k) would not cease to be participants in the defined benefit plan - they would cease accruing additional benefits. As the defined benefit plan would not be terminating and they would remain in active employment, I would expect that there could be no ability to transfer the lump sum value of the protected accrued benefit under the defined benefit plan into the 401(k) plan, but I don't know that for certain.

Does the question look any different if the potential election were framed as in the paragraph above?

[BTG]

Tom, I agree with you that this election wouldn't satisfy 1.401(k)-1(a)(3)(v), but I don't agree that that necessarily makes it a CODA election. If this doesn't fit within the CODA definition in 1.401(k)-1(a)(3)(i) in the first place, then the exception would be irrelevant.

To put it in terms of food (because I'm really hungry for lunch), consider this example:

You can't serve me fruit at dinner, unless it's an apple. If you serve me a steak, that certainly doesn't qualify as an apple. However, since it's not fruit at all, you don't need the exception to avoid violation of the general rule.

[BTG]

2 Cents, you raise a couple of interesting points. Regarding a choice between traditional DB or cash balance formula, see: www.dol.gov/ebsa/FAQs/faq_consumer_cashbalanceplans.html under "Is my employer required to give me a choice of remaining under the old formula rather than automatically switching me to the new cash balance plan formula?"

In terms of whether framing our client's election in terms of "ceasing participation" versus "freezing the benefit" makes a difference, I'm not sure. I'll have to think about that...

Thank you both for your input!