HCE Elections Not to Participate (Posted January 22, 2005) Technical Tip 137: The following question and answer were from the IRS Q&A Session at the 2003 ASPPA Annual Conference: Can a HCE elect not to participate in a qualified pension or profit sharing plan? Response: A plan may exclude from participation designated classifications of highly compensated employees, but an employee can elect only once to not be covered, and the plan must offer the election when the employee is first eligible to participate. Comment by the RLR&C ERISA attorneys: This response addresses the "deemed CODA" issue. If an employee is permitted to elect in or out of a plan from time to time and has his compensation adjusted to correspond to the employer contributions to the plan, the IRS takes the position that the arrangement is functionally no different from a "cash or deferred arrangement" (CODA) or 401(k) plan. Since the plan document probably does not contain a 401(k) feature (and couldn't in the case of a defined benefit plan) and the plan probably would not pass the ADP test, a plan that permits this would be subject to disqualification. But absent this concern, there is no absolute rule under the Code that limits "elections out" of participation to a single election or requires that the election must take place when the employee first becomes eligible to participate. View all Tips © 2012 Reish Luftman Reicher & Cohen, a Professional Corporation Important notice: Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner's situation. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation.