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Participant Opts Out (waives out)


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I understand that a participant can opt out of the plan .   And that if they do they can not return.  If a participant opts out, they no longer are part of plan testing.... correct?

EDIT:  I meant "Waive out"

And Dang... meant to mention this.... This guy has 2 daughters.  Would they be considered HCEs due to attribution?  I'm guessing they are both older than 18. 
My thought was they may screw up testing so have them waive out... take them out of the equation.  But if they are HCEs by attribution then no issue if they defer very little or nothing at all. 

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  • Basically changed the title to Participant Opts Out (waives out)

For purposes of this reply, the use of "opt out" or "waive out" in the question means an individual makes an irrevocable election not to participate in an employer-sponsored plan prior to becoming eligible for any employer-sponsored plan

My understanding is:

  • For coverage testing, this employee is included as a non-excludable employee in testing for deferrals, match and NECs. 
  • For nondiscrimination testing, this employee is excluded from ADP and ACP testing, but is included in testing NECs.
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People who waive participation like that are still included in your coverage testing, just as not benefiting. 

That's what you want if the guy's an HCE.  As to whether the daughters are HCEs also, I suppose that depends on why the first guy was deemed an HCE in the first place.

 

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Here is the situation....

EE1 = 100% Owner (HCE)
EE2 & EE3 = daughters... HCEs by attribution?
EE 4 ~ 6 = Employees who earn on average $500k+  (HCEs)

Owner only wanted a defer only plan... didn't want to make any kind of employer contributions, no SH or PS.

If daughters are HCEs due to attribution and don't defer then no ADP problem.

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oh then the daughters are HCEs as well, so your HCE average is going to be one-third whatever rate the owner actually contributed.  Very good for testing purposes indeed.  Unless you've got a top heavy plan, you might indeed be able to not require any further employer contributions.

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Great point - all HCEs means no coverage or ADP testing issues but if top-heavy because non-owner/non-key HCEs do not defer or do not defer enough, then they must get a THM from the employer.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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So in the end there is no such thing as a defer only plan.  There could always be an instance where a THM is required.  3% at that.  

Brings up waiving out of the plan all together.  If the girls waive out would I need to worry about THM?

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Check the rules on participation waivers. You are probably better off excluding from the Plan in the document than having them execute a waiver. Pretty sure it must be executed before they become eligible and must be irrevocable. I believe it also applies to all future plans the employer may adopt but not 100% certain on that point.

In your example the Owner and both daughters are all both HCEs and Key employees since they are all 5% owners by §318(?) stock attribution rules.

All the rules for top heavy continue to apply.

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@Lou S. is correct that the "waive out"/"participation waiver" is a lifetime election with respect to any retirements that the company may sponsor now or in the future.  That is pretty harsh, particularly if a daughter wishes at some point in time to work for dad's company and want to get a retirement benefit.

Lou also is correct to reiterate that if either already meet the eligibility and entry requirements of the plan, it is too late to waive out.  The waiver is off the table.

The discussion about Top Heavy Minimum contribution is most appropriate and the TH plan provisions should be reviewed carefully.  Most importantly, Top Heavy status is based on accounts of Key Employees, and the definition of Key Employee is not synonymous with the definition of Highly Compensated Employee.

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IF the employees 1-6 listed above are truly all 6 of the employees in the plan, then go with a safe harbor 3% nonelective, but indicate the sponsor will only allocate it only to NHCEs.  If there really aren't anyone but those six HCEs, then you'll have manipulated the top heavy exemption for SH plans perfectly, no?

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