Religious exemption from plan participation

Plan sponsor has an employee who wants to be excluded from the plan due to religious reasons.  Eligible employees receive the 3% SH and a small PS.  It is not workable to exclude him by job definition or class, location, etc.  Very strange and I will tell the sponsor he must participate.  Maybe use the beneficiary designation to assuage his objection to the plan whatever that might be.

It's not strange and has come up more than once on this board. The consensus seems to be that yes they have to participant for IRS compliance reasons. I believe the objection is usually centered around "interest" being against their faith.

You can find prior discussions on this topic if you search the threads.   The word "religious" is a good search term.

If the plan permits, person can opt out of employer plan(s) BEFORE (s)he would enter the plan. However, if this person is kept out under any method (election or plan provision), (s)he is not excluded from coverage and nondiscrimination testing.

I have run into this issue several times in the past few years and we also tell people that participation is not optional due to various IRS requirements.  But by any chance is your reluctant employee Muslim?  Our plans offer a self-directed brokerage account and there are a number of sharia-compliant funds (such as Amara) easily available.  

If the participant’s objection is based on sharia and the plan provides participant-directed investment, the plan’s sponsor or administrator might consider adding to the plan’s designated investment alternatives a fund with investment strategies to meet sharia. These might be available in a recordkeeper’s platform (even without needing a brokerage window), or could be added on a plan fiduciary’s request.

If whether an individual-account retirement plan generates account balances that could provide retirement income depends exclusively or heavily on whether eligible employees make elective contributions and the plan’s fiduciary prudently finds that some eligible employees would not contribute unless they can direct investment to a fund that meets one’s religious or social interest, that finding might support selecting a fund that otherwise might not be selected as an investment alternative (if the fiduciary finds that the availability of the investment alternative would not harm other participants, or that harm to other participants involves a reasonable balancing within a fiduciary’s duty of impartiality).

The US Labor department’s revised investment-duties rule to be published tomorrow tends to support that idea.

“The plan fiduciary of a participant-directed individual account plan does not violate the duty of loyalty under paragraph (c)(1) of this section solely because the fiduciary takes into account participants’ preferences in a manner consistent with the requirements of paragraph (b) [prudence] of this section.”

To-be-codified 29 C.F.R. § 2550.404a–1(c)(3) (to be published Dec. 1, 2022; effective Jan. 30, 2023), https://public-inspection.federalregister.gov/2022-25783.pdf.

Great stuff Peter. I agree that most major RKs could possibly have a Sharia-compliant investment offering (I know we do) and a brokerage window may not be necessary.