401k withholding and rehires

[CLE401kGuy]

Plan with approx 8000 lives and continuous flow of rehires - rehires automatically re-enter the plan per the plan document - could /should the sponsor just leave any terminee's 401k withholding percentage in their payroll system so if they rehire, 401k automatically re-starts - and should the participant be given materials again since they rec'd the materials at original hire. SPD describes how rehires are automatically back in the plan subject to rehire rule / rule of parity described in more detail in plan doc....

I'm looking to recommend to sponsor to leave the 401k withholding % in their system so it's automatically re-started to avoid having to cherry-pick thru rehires to see who had been participating before... our office verifies as contributions are made that rehires are subject to re-entry thru retirement plan software.... (in the vast majority of cases based on how rehires are made this seems like it will work best) - no additional enrollment materials on rehire since they rec'd the info at original hire...

Any thoughts or points to ponder would be appreciated....

[BG5150]

I don't think it's a great idea.

If the person was gone a few weeks or maybe a month or two, then there might not be a problem. What if someone was gone for a few years? They might not even remember how much they were withholding.

[CLE401kGuy]

Would you feel differently if enrollment materials stated prominently that rehired employees who had been participants immediately re-commenced participation at the rate of 401k withholding in place at termination subject to the requirements of the plan document?

something to note also is that only 8% of eligible participate - of this core group more than half of the people have over 5 years of service so they are much stickier employees than those who are apt to come and go.... so by leaving in the 401k %, it would save the client from cherry picking the random participants to re-enroll who had been contributing at term...

Agree with the fact that a participant might not remember he or she was doing 401k but ceasing 401k is immediate so they could turn it off immediately if they decided they didn't want to continue contributing on rehire

I really appreciate your point of view - this becomes a tricky issue with such a large employer!

[chc93]

We had a similar situation. Participant deferring 10%, terminated. When rehired, payroll kept the 10% deferral rate (I think they forgot to remove it)... but participant took a few paychecks before realizing that he didn't want deferrals after rehire but had 10% taken out. I think the participant also assumed his deferral rate would be 0% on rehire unless he asked for it again.

I realize this is a single participant, and you're dealing with a very larger group. But don't rehires still have to sign something upon rehire, payroll has to be set up again, etc. Maybe at that time, the participant can be informed about his salary deferrals... whether he was deferring in the past or not.

I would lean towards setting deferral rate to 0% on termination. Upon rehire, it would be up to the participant to elect again if desired.

Just my thoughts... FWIW

[CLE401kGuy]

I really appreciate the feedback, helping me shape response to the client!

[GMK]

Since rehires are participants and immediately eligible to participate when they are rehired, I suggest providing a one-page summary notice to rehires. The notice would inform them that they are participants and that they can have another copy of the SPD if they want one. If there were changes to the SPD while they were away, give them copies of the relevant SMM's or the most recent revision of the SPD, whatever now applies.

If the employer keeps deferral rates in the payroll system, then the notice would list the deferral and investment elections that applied when the person termed and would state that those elections will continue to apply unless the rehired person files a written election change form. I would give this to all rehires, in part to remind those who didn't defer before that this is their chance to jump in and enjoy this benefit.

Alternately, if the employer sets the deferral rate to 0% when people terminate, then the notice would say that (so people don't mistakenly think that what was before will continue again), and invite the rehire to make elections.

At least, that's probably what I'd do.

[david rigby]

Having a rehired EE automatically eligible to contribute at rehire date is not the same as having that person elect to contribute.

[Earl]

Since it is a lot easier to have people consistently do nothing (leave def election in pay record) than it is to get people to consistently do something (remove def election upon termination and re-enroll person upon re-hire) I would set up admin procedure accordingly.

[Peter Gulia]

I advised on these issues in the early 1990s. (Employers' payroll methods and recordkeepers' systems then were considerably less capable than nowadays.)

Whichever course the employer chooses, the thing is to communicate it consistently and conspicuously.

Even beyond a fiduciary's duty to communicate information that it should know a participant needs, an employer needs a ready answer to the employee's rhetorical question 'why didn't you tell me you would do {whichever course the complainer says he didn't expect (and neglected to ask about)}?