Can a partner opt out of a partnership's 401(k) plan?

[jsamans]

Multi-member LLC taxed as a partnership had two members at the start of 2014 and agreed to establish a solo 401(k) plan to which the company would make a maximum non-elective contribution (20% of net income from self-employment). They added a new member in September, and the new member says he would prefer to forego his 401(k) contribution to keep more money in the company. The other two don't want to give up the non-elective contribution.

Does the new member have the choice to say that he won't participate? I thought the answer was "no" -- that every partner in a partnership entity had to participate equally with regards to non-elective contributions -- but I can't find where I read that.

Thanks in advance.

Jamie

[Bees Knees]

A 401(k) is subject to complex nondiscrimination rules. Thus, it has to pass the ADP test and the ACP test before it can make contributions to highly compensated individuals (the partners) retirement accounts.

A safe harbor 401(k) is designed to by-pass the ADP and ACP test by requiring mandatory employer contributions to everyone's retirement account. The ADP and ACP tests are assumed to have been met with these mandatory contributions. If the partnership does not contribute something for everyone, the 401(k) reverts back to the regular 401(k) rules with the ADP and ACP tests.

A solo 401(k) is like a safe harbor 401(k), but it is designed for just one participant. I'm assuming your 401(k) is actually a safe harbor 401(k) because it is for multiple participants and it has a mandatory employer contribution element.

Thus, if this new partner does not want anything contributed to his/her account, the safe harbor 401(k) will go back to a regular 401(k) with the ADP and ACP test requirement.

[TXEA]

A safe harbor 401(k) only requires employer contributions to an employee's account who elect to participate in the plan and defer salary under a matching choice.

The only time the employer has to contribute based on eligibility only is when the employer electa to make a non-elective contribution for all eligible employees to satisfy safe harbor rules. Few employers choose this option.

The employer has two choices under a safe harbor 401(k) - (401(k)(12):

1. non-elective contribution (must contribute for anyone eligible)

2. matching contribution (must contribute only for those who elect to defer).

As such, the only situation I can see that would require participation of a partner is if the employer is electing the non-elective contribution. There could be other reasons, but I am not privy to them.