Question about starting up 401(k) and one-time irrevocable election

Seth Finkelstein

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Apr 1, 1997, 3:00:00 AM4/1/97

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The company I work for recently started offering a
401(k) plan. I was looking to put in as much as I
could, more than $9500 if possible. In J.K. Lasser's
"Your Income Tax, 1996", on page 137, in the section
"Limit on Salary Reduction Deferrals", I found the
following item:

"Exception for one-time elections: The annual ceiling
on salary deferrals does not apply if at the time you
become eligible to participate in the plan you make a
one-time irrevocable election to have a specified
percentage of your pay contributed to the plan for as
long as you are employed".

I also found something similar on the Web,

Linkname: 401(k) Audit Guidelines
URL: http://www.benefitslink.com/401k_guidelines/1.html

"(3) Although any choice between cash and a deferral
is technically a CODA, the regulations, at
Reg. 1.401(k)- 1(a)(3)(1)(iv), provide an exception.
A one-time irrevocable election by the employee when
first hired or first eligible for any plan of the
employer, is deemed not to be a choice between cash
and a deferral and is therefore not a CODA election."

Yet when I brought this to the attention of the
benefits administrators, they seemed to be completely
unfamiliar with it.

Can anyone shed more light on this exception, and
perhaps provide some advice on how to convince the plan
administrators of it? It seems so useful, but no-one
seems to know about it.

--
Seth Finkelstein se...@mit.edu
[DO NOT reply to "se...@mit.edu", that is a different person]

ro...@newshub.netnews.att.com

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Apr 2, 1997, 3:00:00 AM4/2/97

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Seth Finkelstein wrote:

> The company I work for recently started offering a
> 401(k) plan. I was looking to put in as much as I
> could, more than $9500 if possible. In J.K. Lasser's
> "Your Income Tax, 1996", on page 137, in the section
> "Limit on Salary Reduction Deferrals", I found the
> following item:
>
> "Exception for one-time elections: The annual ceiling
> on salary deferrals does not apply if at the time you
> become eligible to participate in the plan you make a
> one-time irrevocable election to have a specified
> percentage of your pay contributed to the plan for as
> long as you are employed".

The pertinent questions seem to be:

1. If the election is made, is it absolutely
irrevocable such that it cannot be changed under any
circumstances other than possibly death?

2. If the election is made upon eligibility and then
a change is allowed nullifying the protection under the
exception, are there penalties for any past excessive
contributions?

3. Does "employed" connote "employed by the same
employer" or "employed until retirement"?

It is an interesting loophole (?) that I've never
heard before.

Greg Sopin

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Apr 2, 1997, 3:00:00 AM4/2/97

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Seth Finkelstein <se...@athena.mit.edu> wrote:

> The company I work for recently started offering a
> 401(k) plan. I was looking to put in as much as I
> could, more than $9500 if possible. In J.K. Lasser's
> "Your Income Tax, 1996", on page 137, in the section
> "Limit on Salary Reduction Deferrals", I found the
> following item:
>
> "Exception for one-time elections: The annual ceiling
> on salary deferrals does not apply if at the time you
> become eligible to participate in the plan you make a
> one-time irrevocable election to have a specified
> percentage of your pay contributed to the plan for as
> long as you are employed".
>

> I also found something similar on the Web,
>
> Linkname: 401(k) Audit Guidelines
> URL:
> http://www.benefitslink.com/401k_guidelines/1.html
>
> "(3) Although any choice between cash and a deferral
> is technically a CODA, the regulations, at
> Reg. 1.401(k)- 1(a)(3)(1)(iv), provide an exception.
> A one-time irrevocable election by the employee when
> first hired or first eligible for any plan of the
> employer, is deemed not to be a choice between cash
> and a deferral and is therefore not a CODA election."
>
> Yet when I brought this to the attention of the
> benefits administrators, they seemed to be completely
> unfamiliar with it.
>
> Can anyone shed more light on this exception, and
> perhaps provide some advice on how to convince the plan
> administrators of it? It seems so useful, but no-one
> seems to know about it.

This one-time election option must be a feature of the
plan itself. If it's not offered in your employer's
plan, there is nothing you can do about it.

There are good reasons why this feature in not included
in most plans. It adds complexity to the plan with
regard to the discrimination rules and testing. Also,
most employees would not make the election if it was
offered. Remember, it's irrevocable. The whole idea
behind Section 401(k) was to increase flexibility
beyond a normal defined contribution plan without a
CODA feature.

- Greg Sopin

Harry J. J. O'Neill

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Apr 2, 1997, 3:00:00 AM4/2/97

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You correctly cite the law. However, most employer's
plans do not permit such an election for whatever
reason. My experience is that employers are reluctant
for a few reasons--(1) selfish (since most business
owners or key employees missed out on this election
since they've worked/participated a number of years,
there's nothing in it for them); and (2) the inevitable
pleadings from employees who made the election that
they now want to terminate it. I agree that this is
could be beneficial in the right circumstances.

--
Harry J. J. O'Neill
Oakton, Virginia
hjon...@erols.com

Stephen P. Pope

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Apr 2, 1997, 3:00:00 AM4/2/97

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Could this exception be applied to self-employed
plans, such as Keogh or SIMPLE-IRA? Could, for
example, the plan administrator of a one-person
Keogh declare that this exception is allowable
under the plan, and contribute up to 100% of his
earnings to the plan?

It's probably too extreme of a move, financially,
for most people, but I'd be curious to know if it
is possible.

Steve

Seth Finkelstein

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Apr 2, 1997, 3:00:00 AM4/2/97

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> "Greg Sopin" <gr...@sopin.com> wrote:
>> Seth Finkelstein <se...@athena.mit.edu> wrote:

>> [J.K. Lasser]

>> "Exception for one-time elections: The annual ceiling
>> on salary deferrals does not apply if at the time you
>> become eligible to participate in the plan you make a
>> one-time irrevocable election to have a specified
>> percentage of your pay contributed to the plan for as
>> long as you are employed".

> This one-time election option must be a feature of the

> plan itself. If it's not offered in your employer's
> plan, there is nothing you can do about it.

If I can convince them that the option exists, is there
a big barrier to them offering it? It's not that they
have rejected it, rather they don't seem to know what
I'm talking about.

> There are good reasons why this feature in not included
> in most plans. It adds complexity to the plan with
> regard to the discrimination rules and testing. Also,
> most employees would not make the election if it was
> offered. Remember, it's irrevocable. The whole idea
> behind Section 401(k) was to increase flexibility
> beyond a normal defined contribution plan without a
> CODA feature.

The irrevocable aspect is less of a downside for me
because I'm now working for a consulting agency, and
the way things change in my field (programming) I would
be astonished if I kept working with them for even two
years. It seems like a good option to shelter some
money, projecting that I wouldn't be with them for
decades.

More detailed questions I would have is how this
interacts with the "normal" elective deferral, and is
there another limit? That is, if there's a typical
0-15% that can be changed, and I elect 20% irrevocable,
does that work out to a range of 20-35% adjustable? If
I made a million dollars, and elected 50%, would half a
million really be permissible under that exception? I
*think* there's a second limit of $30,000 or 25% of
income, whichever is less (something to do with IRC
402(g)?) but that aspect is less clear to me.

Harry J. J. O'Neill

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Apr 2, 1997, 3:00:00 AM4/2/97

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Yes, even if you succeeded in getting your employer to
allow an irrevocable one-time election, you are limited
to the lesser of 25% of pay or $30,000. Any employer
contributions also count against this overall limit.
(The 402(g) limit refers to the $9,500 annual 401(k)
limit.)

--

Harry J. J. O'Neill

Oakton, Virginia
hjon...@erols.com

Greg Sopin

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Apr 3, 1997, 3:00:00 AM4/3/97

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Seth Finkelstein <se...@athena.mit.edu> wrote:
>> "Greg Sopin" <gr...@sopin.com> wrote:
>>> Seth Finkelstein <se...@athena.mit.edu> wrote:

> If I can convince them that the option exists, is there
> a big barrier to them offering it? It's not that they
> have rejected it, rather they don't seem to know what
> I'm talking about.

Yes, there is a big barrier. If this feature is not part of
your employer's present plan, the plan itself would have to be
amended and the IRS would have to approve the amendment before
it could go into effect. If you started employment in the
interim, it would be too late to select this as a compensation
option. Remember, it's a one-time deal available only to new
employees. Remember, this is not something they anticipated when
they wrote the law. It's just a technicality (loophole) that
was later discovered. The reasoning is that the option can't be
an elective deferral because you don't work there yet. As soon
as you become an employee the loophole closes.

>> There are good reasons why this feature in not included
>> in most plans. It adds complexity to the plan with
>> regard to the discrimination rules and testing. Also,
>> most employees would not make the election if it was
>> offered. Remember, it's irrevocable. The whole idea
>> behind Section 401(k) was to increase flexibility
>> beyond a normal defined contribution plan without a
>> CODA feature.
>
> The irrevocable aspect is less of a downside for me
> because I'm now working for a consulting agency, and
> the way things change in my field (programming) I would
> be astonished if I kept working with them for even two
> years. It seems like a good option to shelter some
> money, projecting that I wouldn't be with them for
> decades.

You are not understanding what this option means. The amounts
put into the plan are NOT elective deferrals, if they were they
would be subject to the $9,500 Section 402(g) limits. They are
employer contributions. Unlike elective deferrals, your right
to the employer contributions are not immediately fully vested.
This means if your employer's plan provided for typical
five-year clff vesting; you would forfeit all contributions and
get nothing out of the plan, when you left after only two years.

> More detailed questions I would have is how this
> interacts with the "normal" elective deferral, and is
> there another limit? That is, if there's a typical
> 0-15% that can be changed, and I elect 20% irrevocable,
> does that work out to a range of 20-35% adjustable? If
> I made a million dollars, and elected 50%, would half a
> million really be permissible under that exception? I
> *think* there's a second limit of $30,000 or 25% of
> income, whichever is less (something to do with IRC
> 402(g)?) but that aspect is less clear to me.

You would be limited to the lesser of $30,000 or 25% of
compensation, .

- Greg Sopin

ANYHANDLE

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Apr 5, 1997, 3:00:00 AM4/5/97

to

> The company I work for recently started offering a
> 401(k) plan. I was looking to put in as much as I
> could, more than $9500 if possible. In J.K. Lasser's
> "Your Income Tax, 1996", on page 137, in the section
> "Limit on Salary Reduction Deferrals", I found the
> following item:
>

> "Exception for one-time elections: The annual ceiling
> on salary deferrals does not apply if at the time you
> become eligible to participate in the plan you make a
> one-time irrevocable election to have a specified
> percentage of your pay contributed to the plan for as
> long as you are employed".
>

> I also found something similar on the Web,
>
> Linkname: 401(k) Audit Guidelines
> URL: http://www.benefitslink.com/401k_guidelines/1.html
>
> "(3) Although any choice between cash and a deferral
> is technically a CODA, the regulations, at
> Reg. 1.401(k)- 1(a)(3)(1)(iv), provide an exception.
> A one-time irrevocable election by the employee when
> first hired or first eligible for any plan of the
> employer, is deemed not to be a choice between cash
> and a deferral and is therefore not a CODA election."
>
> Yet when I brought this to the attention of the
> benefits administrators, they seemed to be completely
> unfamiliar with it.
>
> Can anyone shed more light on this exception, and
> perhaps provide some advice on how to convince the plan
> administrators of it? It seems so useful, but no-one
> seems to know about it.

If this type of one-time election is made, the
contribution is considered an employer contribution
under 401(a) of the IRS code. In order for this
type of contribution to work, it must be made on a
non-discriminatory basis. Another way of looking
at it is your pay is reduced and the employer makes
a contribution to the plan on your behalf. However,
the contributions must be made to all plan
participants on a nondiscriminatory basis. The rules
for nondiscrimination are too complicated to get into
in this post but they can be found under IRC sections
410(b) and 401(a)(4).