Irrevocable Waiver

I have an interesting situation that I don't know how to fix so I'm hoping someone out here has come across something.  A new 401(k) plan was adopted 1/1/2020 - not safe harbor with discretionary match and profit sharing.  Volume submitter plan document allows for irrevocable waivers and the plan sponsor wanted it because many employees wanted no part of the plan due to religious beliefs.  We received the irrevocable waivers in December of 2019.  We have now received the 2020 census data - every NHCE signed an irrevocable waiver and the only eligible plan participants are the owners.  There were 7 NHCE who exceeded the statutory eligibility requirements so they are showing up as eligible, not benefiting, for 410(b).

These employees want no contributions from the employer for religious beliefs which is why they signed irrevocable waivers in the first place.  Any ideas out there about how this should be handled?

You have a demographic failure that is likely to always exist with no good way to correct it that I can see. Either the waivers should not have been allowed or the plan should not have been implemented. I'm not sure what the correction is but it likely involves taxable refunds of deferrals and termination of the plan. Hopefully there haven't been any employer contributions yet.

Maybe other problems also.  IMHO, this implies a need to research whether it's appropriate to use waivers.  Maybe, start by looking for other discussion threads with a similar theme.  For example, 

These employees that are not otherwise excludable will be treated as not benefiting for 401(k)/(m) testing. So, the answer in all likelihood is you will not pass coverage. Out of curiosity, what exactly is the religious belief that prevents them from deferring? 

48 minutes ago, FORMER ESQ. said:

Out of curiosity, what exactly is the religious belief that prevents them from deferring? 

I really don't know the particular religion, but if I recall it has something to do with having interest bearing accounts. Regardless, each NHCE signed an irrevocable waiver. My solution going forward, although no good for 2020 and 2021, is to use a safe harbor match with no profit sharing contribution provisions. They will have to bring some NHCE in to pass coverage for 401(k) and 401(m) but since they signed waivers, couldn't they be treated as electing to defer 0%? Therefore the NHCE that do not want a 401(k) account do not get one and the owners still get to make contributions and receive a match.

33 minutes ago, Catch22PGM said:

since they signed waivers, couldn't they be treated as electing to defer 0%?

Nope. A one-time irrevocable election is NOT treated as a 401(k) election. 1.401(k)-1(a)(3)(v)

Check plan language, my recollection was that an irrevocable waiver could be rescinded by the employer if necessary to satisfy coverage. Of course for 401(k) coverage, this was evident from the start and you're likely looking at QNECS for these people whether they want them or not. 

On 2/1/2021 at 3:00 PM, david rigby said:

Maybe other problems also.  IMHO, this implies a need to research whether it's appropriate to use waivers. 

Would be interested more in learning about your position, david rigby. I think waivers are certainly problematic from a policy perspective, and can make it impossible to pass coverage as explained above, in the wrong fact setting, but I thought they were otherwise on solid ground under case law and with IRS. I have actually had to fight the issue a couple of times and won on case law.

I don't think legal and appropriate are the same Luke. The waivers I'm sure are perfectly legal, but in a small plan setting they are rarely appropriate.

Good point, Lou S., but then not so much a matter of research. I think that word in david rigby's question may have thrown me off.

1 hour ago, Luke Bailey said:

Would be interested more in learning about your position, david rigby. I think waivers are certainly problematic from a policy perspective, and can make it impossible to pass coverage as explained above, in the wrong fact setting, but I thought they were otherwise on solid ground under case law and with IRS. I have actually had to fight the issue a couple of times and won on case law.

I re-read the referenced other thread, and suggest the arguments therein lead me to believe that waivers may be an "overreaction" to someone's objection to participating in the Plan.  The EE does not create - or design - any employee benefit: (a) If there is a k-feature, it's pretty easy to elect no deferrals; (b) If there are ER contributions, there is no requirement that the EE (upon severance of employment) take anything; (c) If it's a DB plan, the EE is not required to "apply" for retirement benefits (yes, the RMD is somewhat different).  In a nutshell, I'm unsure the ER has to do anything when an EE expresses a "religious objection" as suggested in the OP; the obligation to do something, or not do something, belongs to the EE.

On 2/1/2021 at 4:04 PM, Catch22PGM said:

I really don't know the particular religion, but if I recall it has something to do with having interest bearing accounts. Regardless, each NHCE signed an irrevocable waiver. My solution going forward, although no good for 2020 and 2021, is to use a safe harbor match with no profit sharing contribution provisions. They will have to bring some NHCE in to pass coverage for 401(k) and 401(m) but since they signed waivers, couldn't they be treated as electing to defer 0%? Therefore the NHCE that do not want a 401(k) account do not get one and the owners still get to make contributions and receive a match.

Look one of the worlds largest religions has a prohibition on paying and earning interest.   To be clear there are conservative strands of Islam they take this very serious.   The thing is if this is the issue the waivers was the wrong answer.   Islam is big enough in the US that there are Islamic investment funds that don't pay or earn interest that address such concerns.   Look up Sharia compliant funds and you will find funds that don't deal with interest.    So if that is the issue and if the employer can undo the waivers (or can they start a new plan??? I haven't ever looked on the waiver issue to get the employees in a plan without waivers) maybe the issue is to finding investment funds the employees would be willing to invest it.   After that you get them into the plan.   

If it is a different religion and/or interest isn't the issue this isn't a solution.   But there is no way you can run a plan and not have most to any NHCEs benefit.  I think the solution is found in addressing the employees' concerns not trying to find a good way to ignore them.