Failure to Offer Enrollment to Eligible Employees

[Guest Buzzman]

If an employer fails to realize until after the enrollment period ends that new employees of another company in its control group are eligible for its 401(k) plan, is there anything it can do to enroll them prior to the next enrollment period?

In this case, Corporation X has had a 401(k) plan for several years (Corporation X Plan). Corporation Y was formed in March 2007 and has the same ownership as Corporation X, so both corporations are in the same control group. The Corporation X Plan provides that employees will be eligible for enrollment after one year of service and allows for enrollment on a bi-annual basis (January 1 and July 1 of each year). Corporation Y has determined that certain of its leased workers are leased employees for purposes of Section 414(n)) effective March 2008 and therefore became eligible to enroll July 1, 2008. However, Corporation Y did not make this determination until now and the enrollment period is over.

Is there anything Corporation Y can do to get these eligible leased employees into the plan now or must it wait until January 1, 2009? Additionally, if it must wait until January 2009, could this have a detrimental impact on non-discrimination testing for the Corporation X Plan for 2008 or will these newly eligible leased employees not be counted for non-discrimination testing until the 2009 plan year?

Thanks in advance for any thoughts on this issue.

[Guest Sieve]

I know, Buzzman, that we've talked about THIS one before . . .!!

If you have a standardized prototype plan, the leased employees will probably be required to participate without the other member of the controlled group actually adopting the plan. Check the document. If they aren't required to be participants as per the document, then have that new entity adopt the plan. Then, amend the plan for a special entry date for the newly-eligible leased employees and get them in--and deferring--as soon as possible. Then, probably, you should correct under EPCRS for the period of time they were not in the plan (although you could take the approach I've suggested of just asking the employees, if they inquire, to amortize their desired annual deferral across the remainder of the year--but you still might have to correct for any matching contributions, depending on the formula.

Lastly, Buzz, you really ought to engage ERISA counsel because these are difficult issues to deal with on your own, and probably will only get worse--and may be more deep-seeded than you know.

[Guest Buzzman]

Thanks Sieve - I appreciate it

[Guest Sieve]

By the way, Buzz, if you wait until 2009 to get these employees into the plan, they still must be taken into account for non-disrimination (ADP) testing in 2008 because they ought to have been in the plan as of July 1. You then will have to correct under VCP and make an employer contribution (QNEC) on their behalf in place of the employee deferrals they might have made--hence the need to get them in as soon as possible.