I have an unusual situation, and I just want to make sure we don't run into some kind of nondiscrimination issue:

This is a three participant plan. Two of the participants are 50/50 owners of the corp., and the third participant is an ordinary NHCE.

The NHCE signed an election not to participate in the plan dated May 2003.

At the time he signed the election, he still had a contribution receivable applicable to the 2002 plan year.

That deposit was never made on his behalf, so issue number 1 . . . certainly you cannot retroactively opt out of a plan after you've already met the contribution requirements and a receivable has been posted (and possibly deducted from the tax return)?

Number 2, even though he has opted out of the plan, is he still counted for 410(b), as in: included as eligible, but not benefiting? . . . as in, FLUNK? Or is he now a quasi-statutory exclusion?

Thanks!

FLUNK. Need 11(g) to get back in with lowest contribution (cross tested). Not good.

I ask this question based on experience, and the answer doesn't change your situation, but do you think that there is a question of coercion? I have seen plan sponsors attempt in various ways to entice employees to opt out. Unless the participant has some IRA-related reason to decline to participate it is hard to envision a logical purpose here.

I assume the Plan document contains a provision allowing employees to opt out? Many don't, for exactly the reason you have encountered. Good luck.

I have seen a legitimate opt out fact situation involving a nonHCE. The employer contribution was subject to 5-year cliff vesting. The employee was going to night school to be employed in another field in less than 5 years. She was better off with a little increase in salary than with plan participation. It is rare that there is evidence of a limited employment period that will balance waiver of all potential contributions while employed by the employer.

What you have just described could be considered a CODA.

I would take that a step further...not "could be", but "is".

Could the desired result be obtained by employing the person as a contract employee? "gross-up" the pay for FICA?

Coming up with a scheme to make the employee not an employee is very tricky, and certainly not worth this client's effort.

The guy wanted a raise, and the business owners (who do not generate substantial wealth in this business), said "Fine, but we can't afford to pay you more AND make profit sharing contributions.

So he signed an Election not to Participate.

I always get so darned confused about what tests these people are included in, and which ones they can be excluded from . . . arg.

While I think the answer to my question is addressed in this post, I was hoping someone could spell it out for me. If an ER wants to establish a 401(k) plan, and if there are only 2 ee's, owner and another long time ee (nhce), and if the NHCE signs a waiver agreeing to waive all benefits under the 401(k) plan, does that NHCE count in 410(b)? I.E., owner can have the plan all to himself?

Thanks for the comments.

Yes, the employee would still be counted.

'The guy wanted a raise, and the business owners (who do not generate substantial wealth in this business), said "Fine, but we can't afford to pay you more AND make profit sharing contributions.'

This is a compensation issue. What is the employee worth? By forcing no profit sharing contribution, you are 99% likely to have zero contribution allowed for any of the HCE's as well. If the employer does not care about the tax advantages of company contributions, then don't give the employee a contribution. (IOW, throw out the baby with the bath.)

You could set up a safe harbor 401(k) plan using the match. If the employee doesn't defer, he will get $0 and the owners can get something. Of course you can't make him not defer.