Election to "Opt Out"

[jala]

We have just acquired a client that has a safe harbor retirement plan.

We were told that one of the doctors elected to "opt out" of the plan back in 2008.

The doctor is now wanting to participate in the plan. The plan administrator has changed and cannot find a signed copy of the election form reflecting the "opt out".

The prior TPA and prior investment advisor do not have copies of the signed "opt out".

What would your thoughts be on allowing him to participate if a signed document cannot be provided showing his election to "Opt Out"?

At the same time, the plan is a safe harbor plan with a non-elective contribution.

If the doctor were allowed to participate at this time, would the employer be responsible for going back and giving him his share of the safe harbor non-elective contributions for the past years?

I would appreciate your input on this issue. Thank You

[401king]

An opt-out is irrevocable. If he did opt-out, he cannot opt back in. If he did "not" opt-out (i.e. they can't find the evidence), then the plan is in bad compliance shape as you would have late safe harbor contributions for 8 years.

[BG5150]

It is an owner-doctor?

[Mike Preston]

Opt-outs CAN be irrevocable, but they don't have to be. Which way has testing implications.

[QDROphile]

You have to determine if the the "opt-out" was a properly executed one-time irrevocable election in accordance with applicable regulations and plan terms. If so, to allow participation would disqualify the plan.

I will not assert that a revocable "opt-out" of nonelective contributions is impossible, but it is at best fraught with risk and complexity that should be avoided,

Anyone who uses the term "opt-out" is under suspicion of not being capable of pulling off a legal "opt-out." Referring to very complex matters with correct terminology and detail is a sign of comprehension.

[Tom Poje]

if the original document was a standardized document then you would never find an 'opt out' (as noted above the term is 'irrevocable election) because a standardized document has to meet coverage at all times, so you couldn't elect out and thus you would never find such a statement from the person.. that would imply the person elected not to defer which is something different. but then the person would be owed safe harbor contributions unless HCEs were excluded from safe harbor.

in fact, I guess, if the original plan was a nonstandardized you couldn't restate to a standardized is something like that was done!

but I agree with QDROphile, I don't think there is a such thing as a revocable 'opt out'

[Mike Preston]

Sigh. Yes, there is.

[Kevin C]

My first question is what does the plan say? I haven't seen a pre-approved document, including VS, in a long time that allowed anything other than an irrevocable election meeting the requirements of 1.401(k)-1(a)(3)(v).

As hinted at above, the problem with a revocable opt out is that it runs the risk of being considered a cash or deferred election under 1.401(k)-1(a)(3)(v). The current regs were effective 1/1/2006, so they predate the 2008 opt out under discussion. If the opt out was not irrevocable, what did the doctor receive in exchange for opting out?

[MoJo]

Mike said: "Sigh. Yes, there is."

It would be helpful is you explained/provide a cite....

[Belgarath]

Mike can certainly correct me, but I think what he meant, as Kevin also mentions, is that the opt-out/waiver does NOT have to be irrevocable (unless of course that's all the document permits)

If it isn't irrevocable, then it may be a deemed CODA, which has various implications for testing/limitations. Like Kevin, I haven't seen a pre-approved document (which is mostly what I see these days) for a long time that allows anything other than the irrevocable waiver/election.

[MoJo]

Belgarath: Yes, and that is what I was hoping Mike P. would say - the issue with a revocable opt-out is that it *is* a CODA in the eyes of the IRS, and as it applies to a non-elective contribution by the employer, a "disqualifying" event - which essentially means it is *not* permitted.

If there is a non-disqualifying revocable opt-out (other than normal salary deferral choices), I'd like to hear about it.

[Belgarath]

MoJo - do you have a cite for that? My understanding, which may of course be faulty, is that the deemed CODA doesn't automatically result in disqualification of the entire PLAN. (unless of course it is a pension plan)

It would, however, result in a non-qualified cash or deferred arrangement, which subjects the employee's contributions - which in this case would include "employer" contributions, such as profit sharing contributions, to immediate inclusion in income.

See 1.402(a)-1(d).

Thoughts?

P.S. - and I may have been misreading your post - you may not be saying the PLAN is disqualified, only that the contribution(s) in question or "disqualified" and therefore taxable.

[K2retire]

if the original document was a standardized document then you would never find an 'opt out' (as noted above the term is 'irrevocable election) because a standardized document has to meet coverage at all times, so you couldn't elect out and thus you would never find such a statement from the person.. that would imply the person elected not to defer which is something different. but then the person would be owed safe harbor contributions unless HCEs were excluded from safe harbor.

in fact, I guess, if the original plan was a nonstandardized you couldn't restate to a standardized is something like that was done!

but I agree with QDROphile, I don't think there is a such thing as a revocable 'opt out'

With the coverage issue in mind, are there prior year coverage tests showing this doctor as not benefiting? If not, are you sure that the client understands the difference between opting out and declining to defer?

[Kevin C]

I think you would have a very difficult time convincing the IRS that a non-owner employee elected to not be eligible for plan contributions without receiving some sort of compensation in return. Making a choice between plan benefits and a taxable amount makes it a CODA, which as Mike mentioned, affects testing. The amount involved would also be subject to the deferral limit.

I don't think a revocable election allowed by the terms of a plan would automatically disqualify the plan, but I would expect it to be likely to violate something in the 401(k) rules.

Hopefully, the real situation is that he elected to not defer as K2 mentions.