plan entry date question

[K2retire]

I've talked to a particular client so much about their automatic enrollment errors that I'm not sure which way is up any more. Eligibility is age 18 with 1 month of service. Plan entry is immediately upon completion of the eligibility requirements.

The client's payroll service is telling them that means the first pay period that ends after one month of employment. (example, DOH 9/10, pay period end 10/22, first eligible paycheck date 10/28)

I always understood it was the first paycheck that occurs after one month of employment. (example, DOH 9/10, pay period end 10/8, first eligible paycheck date 10/14)

Is there some flexibility in which way it is calculated so long as they are consistent?Is there a reference that I can provide to settle it?

[QDROphile]

The plan says what the plan says and either interpretation is legal. Although I bristle at the idea of the payroll service rather than the plan administrator determining the meaning of plan terms, conformity with the payroll practices is often a necessary evil. The solution is to amend the plan so the terms clearly fit the practice. Oh, wait. I forgot. Nobody has plans that they can amend for language any more. The solution is for the plan administrator to adopt a written interpretation that reconciles the plan language with the payroll practice.

[hr for me]

There's always going to be some lag time between eligibility date and the first paycheck where money is deferred. Personally I would expect the employee to be able to fill out a form/sign up online at the 1 month eligibility date and it would hit the next payroll processing cycle dependent on how long it takes the input/feed to get to payroll and what timelags exist in that process.

It's going to be different for every employee since every employee's eligibility date will be different under the 1 month of service definition rather than something like the first of the month after 1 month of service or something that limits a bit more.

Payroll may be telling them that based upon that processing cycle. That's often not something the payroll dept can control (direct deposit timelines for example add 2-3 days) How quickly do other deferral changes take effect? To me, they should flow the same way.

[K2retire]

It's going to be different for every employee since every employee's eligibility date will be different under the 1 month of service definition rather than something like the first of the month after 1 month of service or something that limits a bit more.

The issue is with people who are supposed to be automatically enrolled when they enter the plan without signing up.

How quickly do other deferral changes take effect? To me, they should flow the same way.

According to this payroll company, if a deferral change happens in the middle of the pay period, they do the days before the change at the old rate and the days after the change at the new rate.

My inclination is that so long as they are consistent it should be fine. But the CPA who audited the 5500 has been challenging their entry dates. For that reason, I'd like to find something I could point to for justification.

[hr for me]

Sorry if I am a bit off-topic --> The payroll company allows (and calculates) Mid pay period changes ? That's a new one for me. I've always seen it change the beginning of the next payroll period. I can't imagine trying to audit deferral changes mid pay period and having to know compensation by the day. That sounds like a nightmare honestly!

Back in my 401k recordkeeping days, changes were sent once per payroll to the payroll system from the capturing system (forms, online, etc) and then we received the feed of deferrals each pay period and could easily use the deferral % times the compensation to make sure the deferral had been calculated correctly by payroll. And even now with processing payroll for 11 years, I can't say I've heard of a payroll system doing so mid pay period, but I could just be out of the loop since we've used the same payroll system all 11 years.

How often does the deferral change system feed to payroll? Daily? Or is it all tied into the same system? Do you mind telling me the payroll provider/system? I understand if you can't....But it does make me curious since I have been on both sides of this situation (HR/benefits consulting on 401ks and payroll)

[GMK]

I can't imagine trying to audit deferral changes mid pay period and having to know compensation by the day. That sounds like a nightmare honestly!

My thoughts exactly.

At least it doesn't apply the deferral rate changes retroactively. I'm guessing that it's all handled in one computer program, so they only have to input the deferral change and date, but still ...

[K2retire]

It is a nightmare. The client has an online portal for all things payroll and benefits related, but I don't really understand all of those details.

[RatherBeGolfing]

It is a nightmare. The client has an online portal for all things payroll and benefits related, but I don't really understand all of those details.

How is the auditor challenging the entry dates? Are they saying someone should be enrolled on their eligibility date because the payroll company can calculate immediate changes to deferral rates. I have had my share of arguments with auditors but this one has me scratching my head.

[hr for me]

It is a nightmare. The client has an online portal for all things payroll and benefits related, but I don't really understand all of those details.

Even with an online portal, I would hope that someone would be reviewing/approving any changes (which in itself takes a little time). I would hope the employee isn't truly changing a payroll record directly with no HR/payroll input/approval. Can you just imagine the nightmare if an employee changed back and forth multiple times over a payroll cycle?

One would hope the auditor would be questioning the ease and possible errors because of this rather than saying it should be allowed!

[K2retire]

It is a nightmare. The client has an online portal for all things payroll and benefits related, but I don't really understand all of those details.

How is the auditor challenging the entry dates? Are they saying someone should be enrolled on their eligibility date because the payroll company can calculate immediate changes to deferral rates. I have had my share of arguments with auditors but this one has me scratching my head.

Basically the auditor is looking at entry dates and payroll dates. They believe any payroll date after the entry date should include deferrals unless the participant has opted out. (And I agree with this interpretation.)

The payroll company is looking at entry dates and pay period end dates. Because payroll is 5-6 days later than the end of the pay period, some people are being started one pay period later than the auditor thinks they should be.

And the payroll company is also randomly starting some people earlier than they should.

[RatherBeGolfing]

It is a nightmare. The client has an online portal for all things payroll and benefits related, but I don't really understand all of those details.

How is the auditor challenging the entry dates? Are they saying someone should be enrolled on their eligibility date because the payroll company can calculate immediate changes to deferral rates. I have had my share of arguments with auditors but this one has me scratching my head.

Basically the auditor is looking at entry dates and payroll dates. They believe any payroll date after the entry date should include deferrals unless the participant has opted out. (And I agree with this interpretation.)

The payroll company is looking at entry dates and pay period end dates. Because payroll is 5-6 days later than the end of the pay period, some people are being started one pay period later than the auditor thinks they should be.

And the payroll company is also randomly starting some people earlier than they should.

Ok. I don't envy your situation.

I would call the inconsistency an administrative delay, but that may not pass the auditors test.

[hr for me]

I would agree with the payroll company IF they are also using the same method on termination -- that is if there is a last check that deferrals are coming out based on the wages paid after the termination date (which rarely happens). Such that the decision is equal on both ends. Can you make that argument?

That said, I think most plans start as of the first check after eligibility but do have to take into account processing time -- so like you said there could still be a donut hole if the eligibility falls within the 5-6 processing days after pay period close but prior to paydate.

I would say they need to pick a specific choice and always do it the same way for all employees and NOT have inconsistencies. That's much easier to explain to an auditor than multiple ways with lots of IFs.

[K2retire]

I would agree with the payroll company IF they are also using the same method on termination -- that is if there is a last check that deferrals are coming out based on the wages paid after the termination date (which rarely happens). Such that the decision is equal on both ends. Can you make that argument?

To that, the answer is "sort of". It seems that the HR director of the plan sponsor believes all benefits (including 401(k)) stop on the last day of the month following termination of employment. So they've been stopping deferrals from final paychecks if they check date happens to fall in the next month.

Did I mention that this company changed payroll companies due to the prior provider calculating compensation wrong and causing a $54,000 VCP correction?

[hr for me]

Ouch! Were they able to get the prior provider to pay that bill?

But I have to wonder how much of this falls back onto the internal HR/payroll employees and their own lack of training. No good HR/payroll person relies fully on the provider to calculate correctly without audits, checking, etc. But I know way too many who just assume its correct or don't have the knowledge/education to do so.

Are you in a position to review/audit their current processes and offer process management advice? Back in the day, I did a few audits of 401k plans and other HR processes and it truly sounds like they could use it from someone outside of the IRS/DOL!

[K2retire]

I have been working with them trying to improve the process. Unfortunately, I can't bill them for all the hours I've put in because of our advisory relationship. (Not that it's prohibited, by anyone other than my boss.)

The benefits manager has already been informed by the HR director that if she doesn't find and correct all of the errors before this year's audit, she will be fired. I'm glad I don't work for her!