Forgotten Enrollment Entry

[Guest Twinky]

If a participant was eligible to participate in the plan 4/1/08 and the employer forgot to give them the SPD and enrollment form, what are the repercussions to the employer?

Thanks!

[Guest Sieve]

Ignoring any potential ERISA violations for not distributing the SPD timely, if the employee makes a stink then you may have to correct under EPCRS (can't remember whether or not you can self-correct that violation) and make a corrective contribution for the employee in lieu of the missed deferral opportunity. I think that's half of the avergage deferral of the employee's group (HCE or NHCE), but I dont have EPCRS handy to check. A hint, though--establish a special entry date for this person (i.e., put them in ASAP), and try to convince the individual to amortize the desired annual contribution over the remaining portion of the year, then there's no need to correct under EPCRS. After all, only one quarter was missed, and there's still plenty of time for the participant to "correct" during the rest of the year by deferring a bit more.

Be aware, however, that this could also have had an impact on the matching contribution--especially if it is calcualted on a per-payroll basis (i.e., not participating for this last quarter might have cost the participant some of the match)--so you still may need to correct under EPCRS for the "lost" match.

[BG5150]

See EPCRS, Appendix B, Section 2.02.

Sieve was correct. You will have to wait until 2009 until the employer makes the contribution for the missed deferral (and, thus, the missed match), since you have to wait until the ADP test is run. There is also a section on correcting a safe harbor plan. Here is EPCRS:

http://www.irs.gov/pub/irs-drop/rp-06-27.pdf

[Guest Sieve]

That's the second time I've been correct all month!!

Notice that EPCRS takes the same approach in 2.02 that I suggest: ignore replacing the missed deferral and ask the participant to increase the deferral for the remainder of the year. The EPCRS rule requires the participant to actually be given the opportunity to defer for the last 9 months of the year--so, if your plan year ends March 30, you may be able to ignore the elective deferral error as per EPCRS (but you'd still have to correct for the match) if the individual was able to get into the Plan on July 1. Now . . . if the Plan has no matching provisions, and even if your year-end is 12/31, I still might consider, at a practical level, seeing if the employee would be willing to increase the deferral percentage 50% for the rest of the year to end up with the same amount deferred as originally desired: i.e., if the participant wanted to defer 2% of the last 9 months of compensation during the year, and the first quarter deferral opportunity was missed, that individual would simply have to increse to 3% for the last 6 months of the year to come out in the same place. Not the "right" way to do it, but perhaps worth consideration. Of course, you didn't get that idea from me . . . and I've never heard of you . . . and, besides, I don't really exist!!

[BG5150]

The answer I got from TAG is that if there is less than 9 months left in the plan year, the employer must make the contribution at the end of the year, after the ADP is known.

[Guest Sieve]

That's exactly how EPCRS indicates a correction should occur.

[Guest Twinky]

I'm sorry I'm just now responding. I was on vacation.

I had told the client to make sure the employee got the SPD and to get the employee in the plan asap (available for 7/1 entry). I told them the same thing that you are suggesting. Allow them to make up the difference for the missed deferrals. So I guess I'm half way there. The rest will have to be dealt with after the end of the year when testing is done.

Thank you both so very much!

And I had to laugh at Sieve's comment. I use similar comments from time to time too (joking around), like "I didn't say it, you didn't hear it from me, I'll deny it, and you can't prove anything."

[Guest KevinT]

There is a recent study discovered that workers don't contribute as much when automatically signed up into a 401(k) plan. It turns out individuals contribute more to their retirement when they choose to start a 401(k) themselves, rather than when one is started for them. Here's a proof: Automatic 401(k) enrollment plans less effective than opt-in.

[Peter Gulia]

One criticism of these studies is that our public-policy interest is not only about those who make elective deferrals but also about those who, in the absence of an implied-consent enrollment, would not make any elective deferral.

But another way to consider this strand of research suggests that we experiment with setting the presumed "default" elective deferral at a considerably higher rate. Setting too high a rate might lead some people to opt-out to zero. But we could gradually increase the "default" contribution until we reach the one that causes too much drop-off, and then we'd set the rate one step back.