“I actually have two questions if the Experts can indulge me!
“I know that a mandatory contribution to a 403(b) plan must be made a) as a condition of employment, or b) pursuant to a one-time irrevocable election whether or not to participate by the employee at the time of initial eligibility to participate in the salary reduction agreement. Can a plan restrict the condition to only a condition of employment, or must an irrevocable election be permitted as well?
“Also, does irrevocable truly mean irrevocable? We wish to allow an employee who elected not to participate in the plan in the past the opportunity to participate going forward. Can we accomplish this via plan amendment?”
Stacey Bradford, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:
The Experts would be happy to respond to both of your questions! Plans can indeed require employees to contribute as a condition of employment, without offering the option of an irrevocable election. In reality though, not many plans require contributions as a condition of employment, since it creates employee relations issues that are quite obvious. Thus, many plans provide a one-time irrevocable election as to whether to participate as the mechanism for their 403(b) employee mandatory contributions.
As for the irrevocability of the one-time election whether or not to participate, we have addressed this issue in a previous Ask the Experts column. The one-time election is, indeed, irrevocable for the employee’s entire working career with the plan sponsor. Indeed, this can also be a difficult employee relations issue, as there are situations that arise where employees who made a one-time election not to participate in the plan many years ago come to regret that decision. Unfortunately, allowing such employees to join the plan, whether by a plan amendment or otherwise, would mean that the mandatory contribution would no longer be mandatory for anyone; the contributions would be elective deferrals, subject to the 402(g) limit of $18,000 for 2017.
Finally, as noted in our prior Ask the Experts column on the subject, this “mandatory” contribution is considered to be an employer contribution for nondiscrimination testing purposes, but NOT for tax withholding purposes. Thus, FICA would be withheld from such contributions.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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