Automatic Enrollment - payperiod and start of deferrals

[John Feldt ERPA CPC QPA]

Plan has automatic enrollment (3% of pay).

Payroll date: 7/2/1015 (includes wages for service provided through June 27)
Payroll provider's cutoff for paycheck changes: June 28.

Four new employees might enter on July 1.
One of these 4 quits June 30 and gets a paycheck on July 2 and another on July 17. No deferrals withheld from either. No problem.

The other 3 did not return any deferral elections. They get paychecks on July 2. No deferrals withheld. Automatic deferrals withheld on July 17. Problem?

Document says

• "An Eligible Employee shall be deemed to have made an elective deferral election upon satisfaction of the eligibility requirements..."

• " ... provided however that in a reasonable time before the deemed election takes place the Eligible Employee shall receive a notice that explains the ... right to elect to ... alter the amount, ... including the procedure for ... the timing for implementing such election."

• "The Eligible Employee must have reasonable opportunity to file an election to receive cash in lieu ... before such deemed election..."

• "The Company shall contribute to the Plan with respect to each pay period an amount equal to the Elective Deferrals . . . for such pay period"

The Plan Administrator intends to implement this uniformly and consistently. Do they have a valid legal basis for not withholding on July 2 for these other 3 employees?

[MoJo]

It's hard to say based on the language you cite. My "preference" is always to include a "as soon as administratively feasible after the eligibility requirements have been met" language, which then allows the plan sponsor to set in place a process uniformly applied that takes into consideration payroll cut offs and other "adminsitrative" concerns.

[mphs77]

A valid legal basis?

Maybe because the July 2 payroll was for services performed through June 27th which is before their entry date?

[david rigby]

Anything wrong with using "the pay period beginning after hire date"?

[GMK]

... after hire date"

which is shorthand for after entry date or after participation date, depending on your plan wording.

In any case, as noted, you don't defer on pay earned before your entry date. 401(k) elections are not retroactive.

[MoJo]

I'm not sure I agree with GMK. I think it is perfectly legitimate (and in fact commonplace) to use "cash basis" accounting for determining which pay is deferral. If the "pay date" (the date on which the participant has an irrevocable right to cash) occurs after the entry date, but part of the pay is for work performed before the entry date, the entire amount of that pay is "deferrable."

Sorry, but I have no authority (at my fingertips), but the "pay date" is the first day on which the participant has the right to the cash, and hence can defer it at that point if he or she is otherwise eligible for participation.

[Peter Gulia]

What did the automatic-contribution arrangement's notice say about the period allowed for an election different from the presumed election?

What did the notice say about when the presumed contributions would begin?

[K2retire]

I'm not sure I agree with GMK. I think it is perfectly legitimate (and in fact commonplace) to use "cash basis" accounting for determining which pay is deferral. If the "pay date" (the date on which the participant has an irrevocable right to cash) occurs after the entry date, but part of the pay is for work performed before the entry date, the entire amount of that pay is "deferrable."

Sorry, but I have no authority (at my fingertips), but the "pay date" is the first day on which the participant has the right to the cash, and hence can defer it at that point if he or she is otherwise eligible for participation.

I was always told that was the required way to do it since individuals are always cash basis taxpayers.

[GMK]

I stand corrected. Thank you.

The plan could specify that the entry date is the first day of the pay period that begins after the employee meets eligibility, but it doesn't have to.

[PJF414]

Would you have a problem if there are different payroll frequencies in the company? For instance, one person could start on January 1st (monthly), while another group could start on January 6th (weekly), and another might start on the 15th (semimonthly). Wouldn't that potentially be discriminatory if the HCEs had the monthly payroll?