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Why not allow everyone in for elective deferrals?


Peter Gulia

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When the time comes and with some exceptions, a non-governmental § 401(k) plan must (to tax-qualify) permit an employee to make elective deferrals if the employee has at least 500 hours of service a year in at least three consecutive years and has met the plan’s age requirement (for example, 21) by the end of the three-consecutive-year period.

A plan need not provide nonelective or matching contributions for such a long-term part-time employee.

Relief from nondiscrimination and top-heavy rules applies only regarding “employees who are eligible to participate in the [§ 401(k)] arrangement solely by reason of [§ 401(k)](2)(D)(ii)[.]”  I.R.C. (26 U.S.C.) § 401(k)(15)(B)(i); accord § 401(k)(15)(B)(ii).

Some employers are considering simplifying a new provision by making all employees, with no age or service condition, eligible for elective deferrals (without providing a nonelective or matching contribution).

If an employer in its particular circumstances is not worried about coverage, nondiscrimination, and top-heavy rules:

Is there some other reason an employer should consider not extending elective deferrals to all employees?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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I agree with @Kevin C, it is a numbers game for those close(ish) to audit territory.  The regulatory agencies are aware of this and Im cautiously optimistic that we will have a solution before we are actually required to bring the LTPT EEs into the plans.

Other consideration:

Possible impact on fees

Extra administrative work (especially if plan responsibilities are simply added to an employees existing workload
 - includes everything from more paperwork for new employees, enrollment, notices, distributions, possible missing participants, etc.  

 

 

 

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My first thought was in line with Catty.

In addition to auto enroll, if the plan is 3% SH or TH, then, again, there is the potential of having a lot if small, unclaimed accounts.  Especially if the contribution is made well after EOY.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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Small balance accounts - especially a large number of them - impacts pricing.  No service provider wants small balance accounts unlikely to grow significantly in a relatively short period of time.  Our service agreement specifically includes an out to reprice if plan demographics shift.

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I'd say a majority of plans are needlessly restrictive when it comes to limiting employee entry into the 401k plan.   I always start with the idea of nearly immediate entry and then see if concerns (like those mentioned above) would guide to more restrictive entry.    I promote to plan sponsors that long wait times are very damaging to employees ability to save for retirement using qualified plans and unless actual plan specific reasons exist to limit (like those already mentioned) then it is generally easier and better for the employer to have quick entry.   I remind them that entry and eligibility rules were put in place pre-computer systems.

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Friends, thank you for your thoughts.

I see the worries about plan-administration expenses.  Those might include per-plan fees, perhaps incurred because an employer divides its workforce into two or more plans so each’s count is small enough that the administrator need not engage an independent qualified public accountant.  And it might include per-head fees charged for each individual’s account, no matter how small.

Is it feasible to charge those and other plan-administration expenses, including those for notices and other communications, against participants’ and beneficiaries’ accounts?

Or am I too unknowledgeable about what services most retirement-services providers offer to small- and mid-size plans?

I ask because I’ve heard from other practitioners that some employers lack a practical capability to count hours of service, and might find it easier to allow all employees to make elective deferrals.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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1 hour ago, Peter Gulia said:

I ask because I’ve heard from other practitioners that some employers lack a practical capability to count hours of service, and might find it easier to allow all employees to make elective deferrals.

I find this incredibly difficult to believe.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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I don’t know enough to consider what’s believable.  Those of my regular clients that are plan sponsors employ tens of thousands of employees, and have capabilities to count a part-time employee’s hours of service.  I’ll leave it to others, especially the TPAs who asked for my help, to consider whether there are some 401(k) plan sponsors with some employees on whom the employer doesn’t count hours.

Even besides questions about which part-time employees to allow in a 401(k) plan, I remain curious about how much is feasible in charging plan-administration expenses against participants’ and beneficiaries’ accounts.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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13 hours ago, Bill Presson said:
15 hours ago, Peter Gulia said:

I ask because I’ve heard from other practitioners that some employers lack a practical capability to count hours of service, and might find it easier to allow all employees to make elective deferrals.

I find this incredibly difficult to believe.

Agreed.  This usually means "we don't track hours, and we have no intention of doing so for the plan"

 

 

 

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18 hours ago, Planit 401k said:

I'd say a majority of plans are needlessly restrictive when it comes to limiting employee entry into the 401k plan.   I always start with the idea of nearly immediate entry and then see if concerns (like those mentioned above) would guide to more restrictive entry.    I promote to plan sponsors that long wait times are very damaging to employees ability to save for retirement using qualified plans and unless actual plan specific reasons exist to limit (like those already mentioned) then it is generally easier and better for the employer to have quick entry.   I remind them that entry and eligibility rules were put in place pre-computer systems.

We might work in different worlds but I take almost the exact opposite approach - keep 'em out as long as possible.  Otherwise you are creating unwanted employer contributions in a top-heavy plan, and even one particpant with a small balance creates hassles that my small plan sponsors don't need or want.

Ed Snyder

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On 2/23/2021 at 6:13 AM, Bird said:

We might work in different worlds but I take almost the exact opposite approach - keep 'em out as long as possible.  Otherwise you are creating unwanted employer contributions in a top-heavy plan, and even one particpant with a small balance creates hassles that my small plan sponsors don't need or want.

I understand and agree with the keep 'em out approach from a simplicity/administration approach and from an ease of use and expense savings to Plan Sponsor viewpoint (and especially from the top-heavy standpoint). 

I look to see how much that simplicity costs potential participants in the form of lost contribution opportunities.   How many investing years is a person in their 20's unable to contribute to a plan based on job changes and 1 year+ entry wait periods?   I can easily see someone in their 20's loosing 5 out of 10 years of contribution opportunities.  This can help keep overall participant balances low and inefficient from pricing efficiency standpoints (I may be stretching a bit with this comment).   

I also wonder for the majority of employers how many employees leave a job within the first 12 months avoiding a small plan balance vs. leaving a job within the second 12 months creating the small plan balance issue?

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