Money Purchase Plan- CODA

Traditional money purchase pension plan covers collectively bargained employees. A group would like to allow a back door CODA by allowing participants to make negative elections. For example, the default contribution rate may be $10 per hour worked, but an employee has an annual options to elect to defer only $5 per hour and take the rest as wages. 

I'm sure I've seen IRS guidance stating a "negative election" of this type is an impermissible CODA, but cannot find it now. Any help or direction would be appreciated. 

A money purchase plan specifies a mandatory employer contribution of a fixed percent of pay for each employee.  It is not a CODA and employees cannot make an election to change the percentage.

If the plan is a CODA, the notion of a negative deferral election in a CODA was raised in Revenue Ruling 98-30 (see the attached article).  Assuming a negative election is permissible, there is no need to structure a plan with an arcane provision that will confuse everyone.  Design the plan with an auto-enrollment default of 10% and participant can make an affirmative elective to adjust the percentage up or down, including completing opting out.

Negative elections Revenue Ruling 98-30.pdf

This is going back a long way but I believe the 1986 Tax Reform Act first precluded elective defferrals in money purchase plans.  I vaguely recall it was possible and sometimes done before the '86 Act.

"A money purchase plan specifies a mandatory employer contribution of a fixed percent of pay for each employee.  It is not a CODA and employees cannot make an election to change the percentage."

This is really what I'm getting at. A MPPP cannot offer a CODA option, but some tried to get around this by allowing MPPP participants the option to have a lower contribution rate. I'm sure I've seen guidance that states this is a no-go, but I cannot find it at the moment. 

The option is not available so you likely will not find a reference.  Often, we would like to see explicit rules about what cannot be done, but generally the rules are written to say what can be done.

The MPPP contribution is an employer contribution and the employee has no choice to instruct the employer to change it.  A CODA is an employee choice where the employer offers the employee the opportunity either to take cash or have a contribution made to the plan.

This difference is highlighted in many ways.  For example, the 410(b) coverage ratio test employer contributions separate and apart from CODA (think elective deferrals), and also separate and apart from matching contributions because the match is associated with the elective deferrals.

I agree with the above comments. It WAS permissible under some documents back in the Jurassic era or something like that, using a "waiver of allocation" but the IRS did nix this a long time ago - I really can't remember what regulation or guidance took that option away. I do recall that when it was eliminated for everyone else, one company that I know of got a reviewer and approval letter where it was allowed. Annoyed the heck out of the rest of us...

This is not the exact source I've seen before, but the Internal Revenue Manual warns agents to watch for impermissible CODAs in multiemployer MPPPs.

IRM 7.11.6.6.10.2 (09-18-2015) CODAs in Money Purchase Plans

(1)The only money purchase plans permitted to include a CODA are pre-ERISA plans (existed June 27, 1974 and included the CODA at that time). See IRC 401(k)(1).

 (2)Plans or CBAs may contain provisions that, although not described as a CODA, result in elective deferrals. Unless this arrangement is part of a profit-sharing plan and satisfies the requirements of IRC 401(k), the CODA isn't qualified. See IRC 401(k)(1).

 (3)Scrutinize multi-employer plans that incorporate tiered contribution or allocation formulas to determine whether these formulas provide an election.

a.In most cases, when an employee changes classes/tiers, the plan makes an increased contribution and decreases the participant's wages by the same amount.

b.If the participant may elect to reduce their wages and increase their contribution, then the plan is, in effect, a cash or deferred arrangement.

 (4)To detect this type of arrangement, read the language in the CBAs and in the plan.

 (5)If the language is incorporated by reference, be sure that the incorporation follows the rules of IRM 7.11.6.3, Incorporating Auxiliary Documents by Reference.

 (6)The tiered annuity contribution formula could also fail the definitely determinable rule of 26 CFR 1.401-1(b)(1)(i) if the tiers are determined by an individual or party other than the employee participant. The plan may not allow discretion for contributions to the plan, and the contribution must be the employees' decision.

 (7)If you find a post-ERISA money purchase plan with a CODA, disqualify the plan unless:

a.It's an initial plan submitted within its first remedial amendment period and the plan is amended to remove the CODA.

b.The taxpayer enters the Closing Agreement Program. See IRM 7.11.8, EP Determinations Closing Agreement Program.

c.The taxpayer is entitled to IRC 7805(b) relief.

(8)These arrangements are often difficult to detect and tend to be at least partially contained in the CBA. See IRM Exhibit 7.11.6-1, Sample Language of a CODA in a Money Purchase Plan, for sample language which may indicate that a CODA is present.