Employee Refusing Employer Dollars

[MjInvestments]

I have a 401k participant who came out of retirement to do some work.  While he was retired he was saving $6,500 in his IRA and getting the full deduction.

Now - he is covered by a retirement plan because he is receiving employer SHNE and Profit sharing dollars, and is only getting about $1.5k worth of deduction for his $6,500 IRA contribution each year.

1st - Can he refuse employer dollars?
2nd - if he can refuse employer dolalrs and he does - would he still be considered covered by retirement plan? Or would he not be covered because he doesn't receive any dollars from employer?

[Lou S.]

1 - Not if you still want to be a safe harbor plan.

2 - If he is somehow amended out of the plan or allowed to irrevocably elect out of the plan, he would no longer be covered.

By the way it would be too late at this point to somehow get out of the SHNE for him for 2017. And I think it is too late to irrevocably elect out of the Plan because if I'm not mistaken that action has to be done before you become a plan participant.

 

[hr for me]

There is a way to waive participation, but it is my understanding that it is a waiver that can never be revoked as it is a lifetime waiver.  I am finding that they are then not counted as eligible.

And it can totally depend on what is in the plan document....here's a link to some different clauses that I have found: https://www.lawinsider.com/clause/waiver-of-participation  And one actually has it as being available 30 prior to the start of the Plan Year rather than before ever eligile. But what I am finding might be a bit old and very case specific -- But I do agree it would need to be done before the start of the Plan Year in which he is getting the contributions.

 

[My 2 cents]

Nobody promised that person that the set-up would be tax-efficient! 

Besides which, isn't one's IRA deduction limited to what one earns?  How did the person take any IRA deduction at all while retired?

[ESOP Guy]

I know that no one from the employer and TPA can give tax advice but the employer might want to encourage this guy to talk to a tax person. 

So he is giving up a about $5k in current deductions.  He is getting a basis in his IRA instead.  For whatever current savings he is giving up how much in ER money? 

I am having a hard time seeing how he thinks he will come out ahead by giving up free money. This is one of those examples you can't help but suspect the person is allowing the universal dislike of paying taxes to make a bad choice. It is the tax tail wagging the dog metaphorically speaking. 

[jpod]

Yes, this is very silly.  And My 2 Cents raises a good point.  He couldn't have made an IRA contribution without earned income, deductible or otherwise (unless his spouse had earned income and his was a spousal IRA).

[WCC]

Has the ER made the suggestion that he defer his $6500 (or more) to the 401k plan for 2017? I know participants have reasons for not using the 401k (i.e. investment flexibility), but he would get his tax deduction and his free money.

[BG5150]

Tell him to quit if it means that much to him.

[Tom Poje]

hr for me -

while a waiver of participation is possible if the document permits, it has to be done when someone is first eligible, so once in a plan you can't 'stop' and suddenly elect out. otherwise it is no longer a 'waiver' but becomes a deferral election which is something different.

 

so the only other option is a plan amendment excluding him from participation going forward.

 

lets see...if I understand the rules correctly, since he cant get a full deduction he must be

single, making more than 62000

married making more than 99000 or

married filing separately making more than 10000 - I guess this is the only situation that even comes close to making sense

 

and he must have already been working somewhere else (without a plan) for he was putting away 6500/year

 

[MjInvestments]

19 hours ago, WCC said:

Has the ER made the suggestion that he defer his $6500 (or more) to the 401k plan for 2017? I know participants have reasons for not using the 401k (i.e. investment flexibility), but he would get his tax deduction and his free money.

 

For some reason he doesn't like the 401(k). I've mentioned this to him.

 

20 hours ago, jpod said:

Yes, this is very silly.  And My 2 Cents raises a good point.  He couldn't have made an IRA contribution without earned income, deductible or otherwise (unless his spouse had earned income and his was a spousal IRA).

I didn't ask how he was making the contributions.  Obviously I don't want to become a tax expert. Just telling him he can't refuse a SHNE contribution and to talk with his tax guy to review his options.

 

6 hours ago, BG5150 said:

Tell him to quit if it means that much to him.

Yeah I don't know what his plan is. I'm just going to get him to a tax expert and of my back.

 

Thanks for all the help!

[BG5150]

(I really wasn't serious about telling the guy to quit...)