Waiver of Participation
Rev. 09/18/09; E-mail Alert 2009-15

In the past, we addressed waiver of participation in a few FAQs on our website:

May a waiver of participation be made under a standardized prototype plan?
Rev. 03/20/03, E-mail Alert 2003-5, Rev. 09/18/09; E-mail Alert 2009-15

No. A waiver of participation may be made only under a nonstandardized plan. A standardized plan must cover all employees except those in a statutory exclusion group. Thus, a standardized plan may not exclude employees — either by waiver or by employer action. A waiver of participation is also not permitted under EZ or XPress plans.

In 2009, this is still true, but the answer has changed somewhat based on the document the employer is using.

What are the rules regarding an irrevocable waiver of participation?
Rev. 03/20/03, E-mail Alert 2003-5; Rev. 09/18/09; E-mail Alert 2009-15

Our GUST prototype permitted an irrevocable waiver of participation in a nonstandardized prototype plan if the waiver occurred before the date on which the employee became first eligible to participate. In addition, such waiver had to apply to all benefit plans sponsored by the employer.

Under what circumstances may an employee make a revocable waiver of participation? Rev. 03/20/03, E-mail Alert 2003-5; Rev. 09/18/09; E-mail Alert 2009-15

The GUST document permitted an employee who is not a partner to make a revocable waiver of participation in a nonstandardized prototype plan. However, if a benefit had already accrued for the year, the waiver would not be effective until the following plan year. The waiver would then remain in effect until revoked. The plan administrator needs to exercise care that the waiver and revocation are properly completed.

This rule also has changed on the EGTRRA document.

What is the consequence if a partner makes a revocable election after having participated in a profit sharing or money purchase plan?
Rev. 03/20/03, E-mail Alert 2003-5; Rev. 09/18/09; E-mail Alert 2009-15

Partners were not permitted to waive in and out of plan participation. A partner could only file an irrevocable waiver before becoming eligible to participate. If a partner filed a revocable waiver on a profit sharing or money purchase plan, the plan was deemed to be a nonqualified cash or deferred arrangement. The total allocation on behalf of any partner was limited to the §402(g) elective deferral limit ($16,500 for the 2009 year) and not the 415(c) limit ($49,000 for 2009).
In addition, unless the employer’s contributions are 100% vested, the contributions on behalf of the partners are deemed to be after-tax. These partner rules do not apply to Subchapter “S” Corporations.

Again this applied to the GUST document and this has changed on the EGTRRA document.

GUST Prototype Rules
GUST defined contribution prototype plans established under a nonstandardized adoption agreement were permitted to allow for an employee to waive their participation in the plan.  Employees that made an election to waive participation were treated as members of a nondiscriminatory class of employees who were ineligible to participate.  An employee had to execute the waiver prior to becoming eligible for the plan, and the election had to be irrevocable.

Waiver of Participation Eliminated from EGTRRA Prototype, Those who irrevocably waived under prior document are grandfathered.
Rev. 03/20/03, E-mail Alert 2003-5; Rev. 09/18/09; E-mail Alert 2009-15

Plan sponsors are currently undergoing the process of restating plans from the GUST document to the EGTRRA document should be informed that the ability to include a “Waiver of Participation” arrangement for new employees is now severely limited under the new document.  Section 2.11 “Waiver of Participation” of the MHCO EGTRRA Prototype Basic Plan Document now reads:
           
            “Effective with the initial adoption or upon the amendment or restatement of this Plan, otherwise eligible Employees may not execute a waiver of participation.  Any properly executed waivers of participation executed prior to the adoption of the Plan shall be grandfathered and such waiver shall be valid in full force and effect.”

This change was required by IRS for all prototype plans and it is not a rule that applies only to the MHCO prototype. Strangely, this decision was made after the release of the applicable Revenue Procedures and the LRM so no written citation is available.  That being said, our approved language has caused some confusion about the operation of prototype plans going forward.  Again, all employees who previously executed an irrevocable waiver will remain ineligible under the above grandfather provision.

Once the EGTRRA document has been adopted, under no circumstances may any non-grandfathered employee execute a waiver of participation. 

However, nonstandardized plans retain the option to exclude nondiscriminatory groups of employees from participation, assuming the plan is able to pass coverage requirements.  Thus, if an HCE can be excluded by classification, there should be no coverage or discrimination issues.  NHCEs can also be excluded as long as coverage testing is satisfied.

Bill Grossman, ERPA, QPA