Deferrals upon rehire

[Guest caseyb]

Our payroll system does not automatically change a participant's deferral rate to zero upon separation from service - should it? What is happening is upon rehire, the deferrals start automatically even without the participant processing a re-enrollment on the recordkeeping system (different system than the payroll system).

Plan doc is vague on this subject and describes this issue in terms of break-in-service rules but that's not the issue here.

Thanks!

[J Simmons]

Where the plan document doesn't say so, I would think that the break in employment effects a stop of the election in place before the break. You ought to modify the payroll system to drop to zero after last paycheck incident to employment termination.

[rcline46]

Most 401k documents provide for immediate participation upon rehire. So the rehired employee would have the right to start contributions immediately.

If your document so provides, I would either insist your HR people get new forms signed, or leave the prior election in place. The employee can always change if they don't want that level any more.

[Guest 410b]

The initial post makes it sound to me like deductions start for a rehire without any consideration of the wishes of the rehired employee. If that's the case, does that make a potentially difficult situation for the employer?

[rcline46]

Automatic deferrals MIGHT fall under the Automatic Contribution Arrangement rules. Or they might not. Failure to provide the opportunity to defer when an employee becomes a participant is also a big problem. The company needs to get procedures in place and explain them to the rehire.

[Guest Sieve]

Seems like this really is an administrative issue, and it sounds as if the Plan is being administered like an old "negative election" arrangement, now known as an "automatic contribution" arrangement. But, of course, the only regulatory guidance we really have on ACAs is through regulations describing EACAs (for the 90-day return rule) and QACAs (the safe-harbor ACA), so we really don't know if you could have an ACA for only certain employees (in this case, rehired employees who already had an election in place prior to termination of employment) and not for others. But, I think this would violate the EACA requirements--if, that is, you want to be able to return deferrals to the participant (upon request) within 90 days. Assuming you really don't care about the return issue, however, don't you still need to meet the prior guidance on negative elections (PLRS?, Rev Procs?) that require giving an individual sufficient notice that there will be a negative election so that they can stop the deferral before it begins? Is that being done here? I think it would be smarter NOT to use this negative election system for a rehire who may have to be put back into the Plan immediately--unless, of course, you want to give apprpriate and a sufficient negative election notice prior to the rehire's initial deferral.

[Bird]

The participant has a form on file saying to withhold "x" and the company withholds "x." While it might be preferred to get a new form when someone is rehired, I don't see a problem here.

[BG5150]

My thoughts would be to reset it to zero.

[Bird]

To expand on my earlier point, I would rather say to an employee:

"Gee, I'm sorry, the last form we had on file said to withhold 3%, so we did. You can change it to zero now if you want to."

than

"Gee, I'm sorry, when you were rehired we assumed you didn't want any contributions made and re-set your deferrals to 0%. What's that, you want us to put money in for you because we didn't follow the instructions on your last enrollment form? Well, uh..."

[Guest Sieve]

I don't disagree with your approach--it certainly eliminates the need for the company to be proactive and takes the onus off HR to realize that this person doesn't have to wait a year to defer and therefore should immediately receive a deferral election form--although, in a perfect world, I would agree with BG & J Simmons and reduce to 0%. I wouldn't say, when questioned, "We assumed you wanted to defer nothing", but, rather, "Here's a deferral form so you can tell us what you want to defer. We can't defer without one". In my experience, employees are usually angrier when you take funds from their paycheck unexpectedly and unannounced than if you forget to take some money out & move it into a 401(k) Plan.

Question: How would you deal with the "You didn't tell me you were going to defer based on a 7-year old deferral form, so I want my money back" response? I would fear that question more than "You forget to defer my 10% as I expected you would" because, very often, a very small adjustment to a deferral going forward can correct the missed deferral.

[Guest 410b]

rcline's comment and sieve's comment about hr.

This thread starts out as a discussion about how the computer works, but it looks like the real issue is maybe an issue of procedures in regard to rehires for the company.

Defining rehire procedures, steps should be included for checking if the employee had entered the plan (vs being a contributor to the plan) in their prior employement, paperwork should include the appropriate deferal forms if necessary, and changing the deferral percentage in the computer should be part of the specified computer steps.

Would the length of time between the termination and the rehire have any effect on the reasonableness of using a previous election form?

[Guest Sieve]

Legally, probably not. I think it would depend on the procedures established by the employer--it makes sense for those procedures, whatever they are, to be consistent and not depend on time away from employment. Letting people know the procedures before they have a negative impact would be a good idea, too.

As to the payroll system issue . . . Resetting to 0% obvioulsy would require hands-on contact. The issue probably is not one of "resetting" at separation of service, which caseyb says does not occur. No doubt nothing is "reset" when the employee leaves--rather, all data is probably resurrected, as it last was for that SSN, when the employee is rehired, and necessary adjustments are then made. So, there would be no need to re-enter a new DOB, but there would be a need to re-enter a new compensation rate (since that will no doubt be different from when last on the payroll). I don't think it would be difficult to reset the deferral to 0% at the same time that the other data is changed--perhaps a 0% is even entered for new employees (if there's a wait to enter the Plan). When the rehire's new data is entered by hand (including, for example, perhaps a new withholding rate, which I would suspect is not assumed to remain unchanged from before), HR would see that this employee had been deferring when he/she left earlier, and thus could then generate a new deferral form to give to the rehired employee.

[Bird]

Question: How would you deal with the "You didn't tell me you were going to defer based on a 7-year old deferral form, so I want my money back" response? I would fear that question more than "You forget to defer my 10% as I expected you would" because, very often, a very small adjustment to a deferral going forward can correct the missed deferral.

None of the choices are ideal (ideal is just getting a new form), but I would rather tell 5 people "tough sh**, this is the latest form you signed and we have nothing to override it" rather than deal with one person - who comes back a year later, not a month later - who complains about missing deferrals (and maybe matches). I like your practical approach of adjusting deferrals going forward but that doesn't work after a certain point.

I am really surprised, following other discussions about not enrolling participants, where I'm quite sure the consensus was that the plan should follow the EPCRS procedure and make up payments on their behalf, that I seem to be in the minority here. I just can't get my head around the fact that there's a form on file and that anyone here thinks it should be ignored (unless it's darn clear that there's a procedure in place to reset it to 0, and that's clearly not the case here). I certainly don't think the IRS/DOL/court system would ignore that form.

I absolutely agree that procedures should be in place, one way or the other, and explained in employee communications. Maybe the discussion went to "What should be" rather than "what is" and I didn't notice.

[BG5150]

Would the length of time between the termination and the rehire have any effect on the reasonableness of using a previous election form?

Maybe. Some plans call for re-satisfying the service requirements if the person incurs 5 consecutive one-year breaks in service.

Also, if the break is only a few weeks, maybe using the prior election might be valid.

[Kimberly S]

One could argue that terminating employment revoked the prior election, along with any agreement about pay.

The best option is still to require a new election on rehire.

[Guest Sieve]

BG: I thought that the 5-yr b/s rule (allowing prior y/s to be ignored) wouldn't apply since deferrals are fully vested and that rule applies only to those who have no vested interest.

Bird: I think our discussions did move into arena of "what should be", because we can't change the procedure now in place. But the original question (by the way, where did caseyb go, anyway?) was if it "should" be reset to 0%, and we seem to believe that it should (but not necessarily--at least on my part--that it MUST). I can see your argument, Bird, and have not dismissed it out of hand--it's as acceptable an approach, probably, as mine is--although different. A plus for your approach certainly is that whether this rehire should again participate immediately is not something that most HR departments would even think to address because it is probably not part of their checklist for a new hire/rehire, and, for that reason, deferring what was on the prior form at least gets the rehire into the plan on time--and that's a good thing. It's not a procedure which is forbidden by the rules, to be sure, and may, in fact, be preferable from a practical standpoint (&, since I'm not a TPA, I have often been accused of ignoring the practicalities of an issue. (And the issue about dealing with an angry/disgruntled employee is really just a sidebar.) Form my perspective, I'm just not clear why, if an employer gets a new withholding form from the rehire (& I'm sure that would be done--maybe because it's requried by law?) and does not assume that the old withholding form is still accurate, and the rehire if asked for a newly-signed and dated beneficiary designation for the group term life insurance (which is probably done because it's company policy to do so), and if the rehire is asked if the spouse has health care before signing up for the health plan, and if the rehire is asked for address, emergency contact info, etc--or, at least, if the rehire is asked to confirm that what's on file in all these areas remains accurate--why, also, can't/shouldn't the employer confirm the old deferral percentage as part of the same process and make an appropriate entry in the payroll system? Jsut part of the "welcome (back) on board" process.

I really don't think this is the first time people here have disagreed on an answer or approach to a problem. And I suspect it will happen again.

[Guest 410b]

HR would see that this employee had been deferring when he/she left earlier, and thus could then generate a new deferral form to give to the rehired employee.

I wanted to be sure that I understood about rehires correctly. (And this is relevant to my company, not just academic, although I don't know how to get the procedures changed.)

If a rehired person had entered the plan prior to their termination, then they should be considered to be plan participants immediately upon rehire - regardless of whether they were deferring before or not ???

If that is so, in my company at least, HR could not just look at prior deferrals to determine this. We have a very low NHCE participation rate. When I create the testing database at year end I have lots and lots of 0 deferring NHCEs, so I think my HR dept would have to have some kind of procedure directing them to specifically review the prior term of service, not just prior deferring or our current enrollment policies.

[J Simmons]

BG: I thought that the 5-yr b/s rule (allowing prior y/s to be ignored) wouldn't apply since deferrals are fully vested and that rule applies only to those who have no vested interest.

Bird: I think our discussions did move into arena of "what should be", because we can't change the procedure now in place. But the original question (by the way, where did caseyb go, anyway?) was if it "should" be reset to 0%, and we seem to believe that it should (but not necessarily--at least on my part--that it MUST). I can see your argument, Bird, and have not dismissed it out of hand--it's as acceptable an approach, probably, as mine is--although different. A plus for your approach certainly is that whether this rehire should again participate immediately is not something that most HR departments would even think to address because it is probably not part of their checklist for a new hire/rehire, and, for that reason, deferring what was on the prior form at least gets the rehire into the plan on time--and that's a good thing. It's not a procedure which is forbidden by the rules, to be sure, and may, in fact, be preferable from a practical standpoint (&, since I'm not a TPA, I have often been accused of ignoring the practicalities of an issue. (And the issue about dealing with an angry/disgruntled employee is really just a sidebar.) Form my perspective, I'm just not clear why, if an employer gets a new withholding form from the rehire (& I'm sure that would be done--maybe because it's requried by law?) and does not assume that the old withholding form is still accurate, and the rehire if asked for a newly-signed and dated beneficiary designation for the group term life insurance (which is probably done because it's company policy to do so), and if the rehire is asked if the spouse has health care before signing up for the health plan, and if the rehire is asked for address, emergency contact info, etc--or, at least, if the rehire is asked to confirm that what's on file in all these areas remains accurate--why, also, can't/shouldn't the employer confirm the old deferral percentage as part of the same process and make an appropriate entry in the payroll system? Jsut part of the "welcome (back) on board" process.

I really don't think this is the first time people here have disagreed on an answer or approach to a problem. And I suspect it will happen again.

The initial employment ended. Re-hire starts a new one.

Pension rules require immediate re-entry into the plan under certain re-hire situations. It is a re-entry into the plan, not a mere continuation of the old period of participation.

Interestingly, there is either in the old or the new cafeteria plan regs an option for a plan to specify that if the re-hire is within 30 days of when the prior employment ended, the re-hired employee's election from the prior employment is resumed for the balance of the plan year of re-hire. However, as I recall that reg required the plan to so specify in order to have the resumption apply.

I don't think in the absence of plan language, you could simply choose to continue the prior 401k election. The now re-hired employee was ineligible for the plan for the time he was not an employee. That break is significant.

[Guest Sieve]

I've always wondereed--in a 401(k), if immediate re-entry into the Plan is required (making the employee once again a participant), does that also require that the individual must be permitted to defer immediaely, or does that allow the employer to wait until the next entry date to process a deferral election form? Personally, I think that immediate availability to defer is required. But, those regs pre-date 401(k) plans, so can't an argument be made that the individual IS a participant immediately, but simply has to wait a while to be able to defer--or has that argument been totally discounted by the Service?

410b: First, read the Plan doc. to get your answer. Second, break-in-service rules are complicated, and also involve vesting issues. In short, if a participant has never deferred, and has no other $$ in a plan account in which they are vested, then they are not required to be immediately brought back into the plan unless the plan so provides.

[Guest 410b]

Thank you Sieve.

I read our SPD to show reinstatement of prior service immediately upon rehire.

I have used up my "good will" for suggesting problems with our plan right now, but I will keep that in mind for the future.