Under recent approval, 401(k)'s plans were allowed to deduct up to 3% of every participants salary into the plan without the approval of those participants. Does this same ruling also apply to 403(B) plans?

Jim Groves

In response to your question, I am reproducing a series of messages which originally appeared on the . The first message, by my partner Danny Miller, reads as follows:

As previously mentioned on BenefitsLink, Revenue Ruling 98-30 permitted a 401(k) plan to include a "negative election," an arrangement under which, in the case of an employee who does not affirmatively elect to contribute to the plan, the employee's compensation is reduced by a fixed percentage and that amount is contributed on the employee's behalf to the plan. However, we have recently learned that an IRS National Office official has informally taken the position that the concept reflected in Revenue Ruling 98-30 may not be applicable to 403(B) plans. The theory is that such a negative election might run afoul of the nondiscrimination requirement that applies to elective deferrals under a section 403(B) plan. This requirement is to the effect that any participant who wishes to contribute $200 or more a year must be permitted to do so if any participant is permitted to make such deferrals (with very limited exceptions). However, the National Office official did acknowledge that church or governmental 403(B) plans, which are not subject to 403(B)(12) (where the nondiscrimination requirement in question appears), could include negative elections in their 403(B) plans without concern about this particular requirement.

Do any of your plans include negative election provisions? Have any of you had occasion to consider whether applicable state law would permit such elections? In particular, would state laws which mandate that no deductions can be taken from an employee's wages without the employee's consent be deemed to allow deductions if the employee failed to make any election?

David Kolhoff raised some additional questions, as follows:

I don't know of any 403(B) plans that have adopted a negative election provision and I have not looked at the state law issue.

I have, however, considered another potential problem with 403(b)negative elections. That problem concerns Section 22© of the Investment Company Act of 1940 and rule 22©. Not being a securities lawyer, I don't fully understand these issues yet; but I've been advised that the SEC may take a dim view of one requirement of a negative election, i.e., the default investment, which the SEC may see as interfering with the investment decision of the plan participant.

Have you considered the unique securities issues caused by a 403(B) plan?

Danny responded as follows:

You are correct that there are state wage and hour law issues associated with negative elections. I don't have a list of the states, but I understand that there are criminal sanctions under some statutes. I have not researched the securities law issue you noted, but I would mention that section 414(e) church plans are exempt from many provisions of the securities laws as a result of legislation passed in the National Securities Markets Improvement Act of 1996. I have not researched the question of whether or not these church plan exemptions extend to Section 22 of the '40 Act. No 403(B) plans I represent have included negative elections in them to date, but I have a couple of clients who are looking into the issue.

So that appears to be the word to date. Hope this helps!

[Note: This message was edited by CVCalhoun]

1. 403(B) elective deferrals are not subject to an ADP test; so why would an employer want to have a negative election?

2. Plans that provide for only elective deferral contributions may be exempt from ERISA. Adding a negative election could make the plan subject to ERISA.

3. Many 403(B) plans have a lousy choice of investments. Adding a negative election could impose (previously nonexistent) fiduciary duties and increase the risk of lawsuits.

ESOP Wizard brings up some good points. There are two reasons for negative elections. The first is, as ESOPW said, for ADP reasons. The second would be to get more people to save. 3% would have such a minimal effect on a paycheck but still there are those people who are just lazy or don't know the benefits of saving. I was looking at it as a way to get people into saving. The statistics show that where there is a negative election policy, the participation level is over 90% compared to under 10% for the ones who don't.

The second part of ESOP Wiz said that 403(B) plans usually have terrible investment choices. While this is still a fact, there are more and more 403(B) plans that offer just as many investment choices as 401(k)s. In fact, Since ERISA became law, the use of mutal fund shares in permetted under 403(B)(7) of the IRC.

I think that negative elections is a good thing, but I would not want to be the first group to put it in. While us "benefit professionals" understand the importance of saving pretax and getting the people in our plans to utilize such a good savings vehicle, I can see the other side of the fence as well. "What do you mean I'm automatically in the plan?" What right do you have to take my money"? ETC.....