opting out... but failing 410b

[AlbanyConsultant]

Taking over a plan with an owner and two NHCEs.  As NHCE#2 is becoming eligible, she says she wants to opt out of the plan entirely.  But... then it fails 410b, and the correction is to give her allocations.

I've explained this to the financial advisor, the plan sponsor, and the participant.  She is adamant she wants nothing to do with the plan "and I've checked with the DOL and I am aware of my options."  Sigh.

I've had similar situations where someone wants to opt out entirely due to religious reasons... but fortunately, it's never caused a 410b failure.  And she is not answering if her objection is along those lines - not that I'm sure that helps.

What can we do?  Thanks.

[CuseFan]

Satisfy 410(b) using the average benefits test. You will likely need to give NHCE#1 more, and that increase may be more or less than what #2 would have received. 

[david rigby]

Opt out of what?  Employee deferral?  That's pretty easy to accomplish.  Employer match on employee deferrals?  Same easy process. 

The NHCE may not have an option, because the terms of the plan control.  The EE's reason doesn't matter.  Why should the plan/Employer go to extra expense/trouble because the NHCE doesn't want the money?  Remind the EE that the EE is not required to take a distribution (except at time for RMD).  You might review other prior discussion threads on this topic.

[BG5150]

Does the document allow for (ir)revocable elections to forsake participation?

 

[BG5150]

And I would ask what exactly the DOL told her, and if she could provide some sort of cite.

Maybe you could call the DOL and ask.

[Peter Gulia]

As ever, the plan’s administrator must RTFD—Read the Fabulous Documents governing the plan. And if the administrator has a doubt about what the plan provides (including provisions not expressed but implied by public law), a prudent administrator would get its lawyer’s advice.

If those steps find no reason to follow a person’s preference not to be a participant, consider:

A key feature of a nonelective contribution is that it does not require the participant’s election.

This is not advice to anyone.

[BG5150]

We use an FTW doc, and it's an option in the Adoption Agreement.

Quote

2. Opt-Out

  An Employee may irrevocably elect not to participate in Plan pursuant to Treas. Reg. section 1.401(k)1(a)(3)(v). 

But, has anyone seen any legals cases where, when the plan failed coverage and was forced to include someone who had opted out and the person sued?

[Peter Gulia]

That a plan might include a provision of a kind BG5150 describes is why I suggest RTFD.

(A plan’s administrator also might consider whether the provision is valid.)

Even if ERISA § 502(a) might allow a participant’s claim “to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan [perhaps including one’s right, if any, not to benefit]” or claim for equitable relief regarding a fiduciary’s failure to administer the plan according to the plan’s governing documents, a Federal court might find it lacks power to consider such a claim if the plaintiff lacks Article III constitutional standing because the plaintiff was not sufficiently injured.

But a person’s inability to get a court to order a plan’s sponsor or administrator not to provide a benefit the person does not want might not resolve an Internal Revenue Code § 410(b) problem.

If a person had, under an unambiguous plan provision, properly and irrevocably elected not to participate, I wonder whether tax law, for § 410(b) coverage, counts (or ignores) a supposed accrual, if it is contrary to the plan’s provisions, as a benefit provided to the nonhighly-compensated employee.

This is not advice to anyone.

[AlbanyConsultant]

To answer some of the above questions...

Yes, the plan allows for a one-time irrevocable election to opt out of the plan entirely.

I'm referring here to "opting out" of the safe harbor nonelective and profit sharing allocations.  "Opting out" of deferrals is trivial.

 

7 hours ago, CuseFan said:

Satisfy 410(b) using the average benefits test. You will likely need to give NHCE#1 more, and that increase may be more or less than what #2 would have received. 

I always forget this.  I'll have to see if this works.  Thanks!

 

[Belgarath]

Boy, I'm glad I'm retired, other than a very few days during the next month to help my employer through the transition. I've already forgotten most of what little I ever knew.

The legal issues are far beyond my understanding. While I like Cuse's solution, I recall that at least at one time (and it may have changed) there was a potential issue with this - I had written this note to myself back in the day:

There is a potential problem for COVERAGE using the Average Benefits Test, due to the requirements of 1.410(b)-4(b), and whether the IRS believes that having each person in their own group is tantamount to “enumerating by name.” If they believe this, then the ratio test must be passed, because the average benefits test for COVERAGE requires a “reasonable classification” – and enumerating by name or having the same effect is by definition not a reasonable classification.

In addition, I provide this excerpt from ERISApedia (caveat - I have NOT checked ERISApedia to see if the following has been updated in any way!) purely for purposes of possibly adding (or not, as y'all determine) to the discussion.

It is oftentimes overlooked that a waiver must also comply with any ERISA Title I rules regarding the waiver of benefits. Courts often take a dim view of waivers because it is generally not in a participant's best interest to waive a benefit. In Laniok v. Advisory Committee, the court applied a six factor test in determining whether there was a valid waiver of participation in a pension plan:

1) the employee's education and business experience,

2) the amount of time the employee had possession of or access to the agreement before signing it,

3) the role of the employee in deciding the terms of the agreement,

4) the clarity of the agreement,

5) whether the employee was represented by or consulted with an attorney, [as well as whether an employer encouraged the employee to consult an attorney and whether the employee had a fair opportunity to do so], and

6) whether the consideration (e.g., payment) given in exchange for the waiver exceeds the value of the employee benefits to which the employee was already entitled by contract or law. Please note that if the plan is a 401(k) plan, giving consideration for someone to waive participation in the 401(k) portion of the plan would violate the contingent benefit rule (see Chapter 14, Contingent Benefit Rule).

It is the author's experience that few waivers of benefits comply with the Title I (e.g., DOL) rules as described by the court in Laniok. Failure to follow the Title I rules may result in the reinstatement of the participant's benefit.

[Peter Gulia]

To help me learn something:

If an adoption agreement for IRS-preapproved documents presents a choice to include or omit a provision that allows a waiver of participation for a nonelective contribution,

why do some plan sponsors include that provision?

[BG5150]

5 minutes ago, Peter Gulia said:

why do some plan sponsors include that provision?

They don't know any better?  They think they are giving their EEs a fair choice?  Bad advice?

Or they truly have a valued Employee who, for perhaps religious reasons, do not want to be invested in interest bearing investments?

Or, they have Employees who would lose SSI benefits if they get any sort of allocation to the plan?

[CuseFan]

Regarding reasonable classification for average benefits testing - the plan is not naming names for who is eligible or not, this employee is otherwise eligible but is electing to waive coverage. 

[Paul I]

One interesting aspect about the one-time opt-out election is the plan could say the employee could elect to opt-out of the plan and the participant could have the contribution they would have received paid to them as compensation.  Essentially, the regulation was put in to say this arrangement would not be considered an elective deferral. This likely was included because many CODAs before 401(k) was adopted were applicable to profit sharing plans.

Note, though, that this does not say this arrangement excludes considering the employee as being counted as an eligible, non-benefiting employee.