Open Enrollment / Special Enrollment

[BLM]

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Background Info:

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Employees are notified that, if you are an employee on a specific date - the plan will waive it's ordinary eligibilty requirements and you may begin deferring immediately. If you do not elect to defer by a 'certain date' (ie: within 30 days) you will be subject to the plan's ordinary eligibility requirements and must wait until you satisfy eligibility and then you will enter on the plan's next entry date and can begin deferrals then.

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Specific Question:

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Can a plan waive 401k eligibility requirements temporarily, and for those who do not elect to defer require they wait until they do satisfy eligibility?

[Bird]

Boy do I hate seeing the term "Open Enrollment" applied to 401(k) plans. I would be curious to see how what you described is written into the plan document (I don't think it is).

I've seen new plans that said if you are employed on a certain date, that you participate immediately, but new hires after that date must satisfy some eligibility requirements. It sounds like you are describing something where new hires have 30 days to sign up otherwise they have to wait? An employee becomes a "Participant" when they satisfy eligibility and reach their entry date. They may elect not to contribute, but they are still a participant - that is, being a participant and contributing to the plan are two different things.

A plan may only allow you to change your deferral election every so often (quarterly or semi-annually e.g.) and that may be what you are describing, but to answer your question, no I don't think a plan can waive 401k eligibility requirements temporarily, and for those who do not elect to defer require they wait until they do satisfy eligibility?

[hr for me]

I too think you are on sticky ground. How will you classify those employees later? They were temporarily eligible and now aren't? Do you have to satisfy nondiscrimination testing? If so, wouldn't they be considered eligible (since there was a special eligibility window) but not participating. If they are NHCEs that decline and HCEs that don't decline, you are going to skew your ADP/ACP testing.

I do agree it would be better to change enrollment so that all are immediately eligible and then have a new eligibility for new hires. But to switch back and forth on the same employee, I just don't think is a smart move, even if available.

Maybe if you expand on the why the employer wants to do this, it will help bring out the good/bad of it all.

[BLM]

This is for an existing 401(k) plan that has an eligibility requirement of 1 YOS with Quarterly Entry.

In November they opened enrollment and waived the 1 YOS eligibility requirement saying - if you are currently an employee, even if you do not have 1 YOS, you can begin deferrals as long you sign up to do so in the next 30 days. If you do not sign up to start deferrals by the 30 day deadline then you must wait until you have 1 YOS and then you can begin deferrals on an ordinary quarterly entry date.

Effective, only those who chose to defer early (during this open period) are being considered as eligible, while those who chose not to defer are being considered ineligible.

Is this acceptable - or would everyone who was an employee as of the open enrollment period be considered eligible?

[hr for me]

I think you have some problems because the plan document was not followed (nor does it sound like it was amended) and there was no break in service that would make them ineligible again (ex. rule of parity). Now if there were no entry dates possible beyond that one and the next one where they would have gained eligibility you might not be on such shaky ground. It sounds like though with quarterly, you might have 2-3 entry dates in between. Honestly I wouldn't want to argue their case before any legal/regulatory body and would expect that the employer will have to retroactively make them all eligible and possibly make up some missed deferrals/match for those that might have wanted to join at the following entry dates OR return the contributions/earnings and forfeit match on those that really weren't eligible.

And I am still interested in WHY they chose this? The times I have heard something similar are because a newly hired HCE didn't want to wait to gain the service needed to be eligible. If it was that kind of reasoning that that ground is not only shaky, it is quaking.

This was not a great move, but I suspect you already know that and are trying to dig them/yourself out of a sticky pit. I suggest getting some good legal/HR consulting that can help you solve this with the minimum amount of cost to the employer.

eta: I sincerely hope I am wrong and someone else will pipe in with a better solution for you!

[masteff]

If they had annual entry, I could see doing it as a one-time special eligibility with a one-time special entry date. But I can't get past the point that 'hr for me' made above about them having quarterly entry dates and how can they be eligible for the special entry but not for the next quarterly entry (assuming less than 1 YOS).

[GMK]

I'm with Bird.