Excluding Employees Who Express Desire Not to Particiate

[Guest sammy]

An employer owned by group of professionals is setting up a new defined benefit plan. (It already maintains a defined contribution plan.) Prior to drafting the plan document the board of directors polled the professionals to determine who wanted to participate in the new plan. No formal election regarding participation was ever offered to the professionals. However, those who expressed the desire not to participate were specifically excluded from the plan by name. The board of directors, which includes all of the shareholder/employees, determines the compensation of each employee each year. However, in practice, those who were excluded from the plan will receive more cash compensation from the employer than those who participate even though no formal agreement to this effect exists. Is this a cash or deferred election under Regulation Section 1.401(k)-1(a)(3)?

[AndyH]

Excellent question.

I don't have the answer, just a couple of comments. Hopefully this will generate some discussion.

I may be wrong, but I thought you had to have a "reasonable classification" to exclude a group of people. I didn't (and still don't) think you can exclude by name. I think you can specify the benefit level by name, not the inclusion or exclusion of people in total.

What I thought you needed to do was to have a irrevocable waiver (provided the plan allows it) in writing before a person becomes eligible; otherwise you have a cash or deferred arrangement.

Therefore, my impression is that you have a plan that fails to satisfy the qualification requirements. Again, I am not completely certain of this. This is just my reaction. Commments are requested.

[Lorraine Dorsa]

If you can pass 410(B) using the ratio % test, you can exclude employees by name. And if, as presumably is the case, only HCEs are being excluded, the ratio % test should be easily passed and the name issue never even come up.

I've had cases where the client wanted to exclude certain individuals and we were able to do so by using job titles (in many case there is only 1 President, Accounting Manager, etc) or by a combination of job titles and locations.

[Guest]

I agree that you can exclude by name (and define classifications by name)BUT you need to be careful if you intend on letting them back into the plan in the future. Most attorney's I deal with think a one time switch is acceptable and/or five year decisions, that is if your out, your out for at least 5 years.

I think you need to be very careful since the plan could be deemed to contain a cash or deferral arrangement (ie: 401(k)).