We have an employer with a 401(k) PSP who wants to allow employees to make a one-time election of chosing between 1 yr eligibility w/vesting schedule for match and profit-sharing or 2 yr eligibility w/immediate vesting. This smells bad to me, but I can't pinpoint why. Has anyone heard of allowing the employee to elect eligibilty/participation/vesting provisions? I'd love some comments. Please tell me it can't be done (and why . . . ).

A plan cannot require more than a 1 year wait for entry into a 401(k) and an employee cannot elect out of the wait. There can be a 2 yr wait (100% vesting) for match / psp contributions.

What is this employer trying to do? Did he hire an ERISA atty for advice on this arrangement?

401(k) elig/participation is immediate; the 1 or 2 year wait and vesting is for the psp and matching components, as indicated in my prior post. Any comments on allowing the participant to make the decision?

If this is one plan document, then I would not proceed without an IRS letter of determination. If two separate plans, then participant must 'waive' out of one of the plans. 401(a)(26) is not a problem. Plans cannot be aggregated for testing because elig and vesting are different. Employees in opposing plans must be tested as a 0 in 'waived' plan. Could be complications.

I see administration problems, but I really don't see anything illegal. BUt I would require the scheme to be submitted to the IRS for their approval.

I would think that even if you got a Det Letter on this scheme, you would still need to test each group (benefit structure) for non-discimination in terms of Benefits, Rights, and Features.