Key Responsibilities for Employers
One of the most critical responsibilities of a 401(k) plan sponsor is determining employee eligibility and ensuring timely enrollment. Failure to adhere to the plan’s eligibility criteria can result in costly corrections and may even jeopardize the plan’s tax-advantaged status. When 401(k) enrollment is delayed or never offered, eligible employees miss out on important retirement savings opportunities and tax benefits. If any “missed deferral” opportunities are identified, the plan sponsor must act immediately to correct the situation.
Common Missed Deferral Opportunities and How to Avoid Them
Here are some examples of missed deferral opportunities to watch for:
- Employee Eligible but Not Offered Enrollment: An employee has met the plan’s 401(k) eligibility requirements, but they are not offered enrollment into the plan or are offered enrollment late.
- Payroll or Administrative Errors: An employee completes a deferral election, but payroll or administrative errors result in 401(k) deductions not being withheld from their pay.
- Default Deferral Election Not Implemented: An employee does not complete a deferral election, but the plan sponsor fails to implement a default deferral rate in an automatic enrollment plan.
- Incorrect Exclusion of Part-Time Employees: A part-time employee is incorrectly excluded from the plan. A common misconception is that part-time employees are automatically excluded from retirement plans as they are with other types of employee benefits. Unless there is a written exclusion in the plan document, part-time employees must be tracked for eligibility the same as other employees.
- Long-Term Part-Time (LTPT) Eligibility: A part-time employee becomes eligible under the Long-Term Part-Time (LTPT) rules established by the SECURE 2.0 Act. These rules require that employees who work at least 500 hours in two consecutive years be allowed to participate in 401(k) deferrals.
- Off-Schedule Payroll and Missed Deferrals: An off-schedule payroll is run for company bonuses, but 401(k) deferrals are not withheld. Unless the plan document excludes bonuses from eligible plan compensation, 401(k) should be deferred per employees’ elections on file or per a special bonus pay election form.
Understanding Your Role: Who Is Responsible for Tracking Eligibility and Enrollment?
Missed deferral opportunities can happen for many reasons, but one common issue is misunderstanding who is responsible for tracking eligibility and providing enrollment packages. Ultimately, it is the plan sponsor’s duty to understand the eligibility requirements and enrollment process to ensure no employees are overlooked.
Consequences of Missed Deferral Opportunities: Employer and Employee Impact
Not only do these errors result in missed potential investment growth, but they may also mean missed employer matching contributions. For these reasons, the IRS provides self-correction steps through the Employee Plans Compliance Resolution Systems. Several factors determine the necessary correction measures, but generally, the employer will need to take corrective steps on the employee’s behalf, such as:
- Qualified Non-Elective Contribution (QNEC): Depositing a Qualified Non-Elective Contribution (QNEC) of 50% of the missed deferral, including adjustments for earnings. For active employees whose missed deferrals are identified and corrected within a certain timeframe, this QNEC could be waived or reduced to 25%.
- Employer Matching Contributions: If applicable, the employer’s matching contribution must be made based on 100% of the missed deferral.
- Notification to the Employee: Provide notification to the employee of the error, as well as the corrective measures being taken.
The Importance of Timely and Accurate 401(k) Enrollment for Employers and Employees
Ensuring timely and accurate eligibility and enrollment protects both employees and employers from these issues and unexpected corrective costs. A smooth and efficient enrollment process also boosts employee satisfaction, contributing to higher retention rates and helping employers attract top talent.
Contact Your Retirement Plan Consultant for Assistance with Eligibility and Enrollment Issues
Please reach out to your retirement plan administration consultant right away if you are concerned that a missed deferral error has occurred or if you have any questions regarding your plan’s eligibility and enrollment provisions.
