new plan "missing" the first payroll for deferrals

[AlbanyConsultant]

I have a new 401(k) plan going in for a client, and we are now getting word that the platform won't have the accounts ready until after the first payroll date, but likely by the second one two weeks later.

So the plan document and all the SPDs and the enrollment meetings said that deferrals are effective 1/1/17. There are dozens of people poised to defer with the first payroll in 2017. What are workable options?

> I have heard anecdotally that the IRS is actually reasonable in this scenario and will not penalize a plan for missing the first payroll's worth of deferrals. The participants should of course be told in advance that this will happen, but then they can start up with the second payroll with no additional fuss.

> The plan document could be amended to allow deferrals starting with the second payroll period. Again, the participants should be told that this is happening.

> Take the deferrals from the paychecks and deposit them into a plan checking account that is then transferred into to 'real' plan accounts when they are ready. This is my favorite method, though I'm not eager to see how this unfolds with 50 or 60 participants deferring. The participants are told that their first deferrals will be in a 'holding account' for a short while until the real accounts are ready.

> Take the deferrals from the paychecks and hold on to them in the company accounts. This eliminates the extra steps in the last one, but at the cost of lost earnings that have to be calculated.

Any options I didn't cover? Any thoughts on these? Any pitfalls to avoid? Thanks.

[ETA Consulting LLC]

First and foremost, it's not an IRS issue. It's a DOL issue where those amounts are treated (by the DOL) as plan assets as soon as they are withheld from the participants' pay. AND, like any plan asset, the DOL is pretty adamant that they are separated from the employer's general assets (i.e. checking account) as soon as administratively feasible.

With that in mind, two reasonable alternatives would be to have the recordkeeping platform to create a single account (e.g. forfeiture or whatever) for the exclusive purpose of receiving the contribution from the employer and holding it until it can get allocated pursuant to each participants' respective investment elections.

The platform "MAY" have a lockbox account. Depending on the amount of time, the employer may write a check for the payroll amount and mail it into the platform's lock box. By the time it gets cashed and allocated, the accounts may be set up.

Another approach may be for the employer to set up a checking account in the name of the plan for purposes of receiving the deposit. This may be least advisable if we're talking about a delay of a week or less.

The thinking is merely to get those amounts separated from the employers assets as soon as administratively feasible. Whatever you do, ensure each participant's account receives the amount that was withheld from their pay.

Good Luck!

[hr for me]

Why wouldn't you do it the same way that you do a black out period? You do have to notify employees, but deferrals/match still happen, but just aren't posted until such time as the system is up. It used to be that black out periods were weeks and now they are more like days and no plan documents had to be amended.

So I would still take the deferrals and do what ETA suggests.