401k Deferral election made after entry date

[DDB BN]

401(k) plan allows for entry / change to employee deferral contributions on Jan 1st and July 1st each year.  An employee was eligible to start deferring on 07/01/19 and was given notice of their eligibility to defer.  The employee did not inform the Plan Sponsor that they wanted to defer until the end of September 2019.  The Plan Sponsor starting withholding with the next payroll.  Would this be ok based on the SH brief exclusion rule or should the employee deferral contributions be refunded and the employee informed that they may start deferring on 01/01/20?

[Larry Starr]

3 minutes ago, DDB BN said:

401(k) plan allows for entry / change to employee deferral contributions on Jan 1st and July 1st each year.  An employee was eligible to start deferring on 07/01/19 and was given notice of their eligibility to defer.  The employee did not inform the Plan Sponsor that they wanted to defer until the end of September 2019.  The Plan Sponsor starting withholding with the next payroll.  Would this be ok based on the SH brief exclusion rule or should the employee deferral contributions be refunded and the employee informed that they may start deferring on 01/01/20?

First, that is a dinosaur or a plan that only allows changes twice a year. The reality is that the plan should be changed to allow changes in the deferral amount at any pay period. 

Now, as to your situation, the employer was not permitted to take out deferrals starting in September.  Since you are still within the same calendar year, I would probably have the employer reverse the deferrals through the payroll system (which means they will be paid back to the employee now) and treat the money that went into the plan as part of the employer contribution for 2019. There are other options, but this is most likely going to be the easiest (other than amending the plan to make this ok by allowing changes anytime, which is what my plan would have said from the beginning so this issue would not have arisen. FWIW.

[DDB BN]

Thank you.  Many times the individual handling the payroll does not want to be asked to constantly change employee deferral amounts and would prefer to only allow twice a year.  I appreciate your input and will make note when they restate their plan.

[Larry Starr]

12 minutes ago, DDB BN said:

Thank you.  Many times the individual handling the payroll does not want to be asked to constantly change employee deferral amounts and would prefer to only allow twice a year.  I appreciate your input and will make note when they restate their plan.

There is no reason to wait for another restatement; this is an easy amendment to implement.  And the statistics continually show that if you allow people to change their elections any time they want, you get FEWER changes than if you only allow changes at limited times during the year, so the payroll clerk won't have that big a deal in making changes.  And, changes in payroll deferrals are EASY to implement: you go into the payroll program and just change the number or percentage to the new number or percentage for that person.  It ain't complicated at all.  And, who runs the business, the payroll clerk?  Make the change now; it's best for the client AND the participants and it is almost NO EFFORT to implement.

[JPIngold]

Totally agree with Larry!!! In my experience, it is normally the owners who decide they want to crank up their contributions near the end of the year when they see what kind of year they are having. So I learned when I handled the EGTRRA restatements to "encourage" all clients to allow modifications every pay period.

 

[Bill Presson]

Agree with Larry. I've tried to get all clients to do this with general success. Also, I handle the 401(k) plan for our own firm. I get the download the Friday before payroll of any changes requested. I send that info to our payroll clerk and she makes the changes. It takes, maybe, five minutes.

[JackS]

I believe many plans have taken that election out of the adoption agreeement and now treat it as an administrative election.  This means they can change the procedure just by deciding to do it a differnet way and without a plan amendment, although you may have to generate revised enrollment forms & and SPD or SMM.

[justanotheradmin]

I would like to point out that there is a point of confusion for some employers about Entry Dates =/ Deferral Change Dates. They are not the same. 

The plan can absolutely still only have plan entry dates twice a year, but also allow deferral changes each pay period. The semi-annual plan entry date would be in the legal plan document / adoption agreement. As others have pointed out, the deferral change frequency may or may not be in the plan document, as many treat it as an administrative election. 

Sometimes folks equate the plan entry date with an open enrollment period, similar to health insurance. Retirement plan entry dates don't work that way. It is much more common to allow starts, stops, changes, as needed, without waiting for a specific date such as 1/1 or 7/1. 

[Riley Britton]

I am reading this as not the employee wants to change their deferral amount, but wants to start deferring, in which case they don't have to wait till 1/2020 since they were eligible 7/1.  I don't know why their deferrals would have to be removed. 

[Bird]

I agree with others about allowing changes each pay period - it generally results in fewer changes (inertia leads to not doing anything, but some might feel the need to do "something" when changes are allowed each quarter or semi-annually or whenever).

And I'm quite sure this could be a retroactive amendment, so nothing at all needs to be done except to amend the plan before the end of the year to allow what already happened.

And finally, as already noted but worth repeating, make sure you are talking about changes in deferrals and not entry dates.  It's a not-so-fine distinction in my mind but a frequent source of confusion for office managers or payroll people.

[chc93]

Also, I know we are talking about starting or changing deferrals... but on the other end, I thought there was a requirement (not dependent on plan document) that a participant could stop deferrals at any time.  If so, this would/could "mess up" payroll too... as the OP suggested.  So even if starting or changing messes up payroll, stopping at any time would/could do the same.  Don't see the reluctance, as others have already said.

[Patricia Neal Jensen]

We (TPA drafting plans)always  allow deferral starts and changes any pay period.  I agree with Larry and others who indicate that this is the "modern" way this is done.  I also absolutely agree that opening it up like this has the effect of diminishing the concern an employee has on this topic and the plan sponsor will definitely get FEWER changes because of this.

PNJ

[K2]

I have a plan where a participant has changed deferral elections 8 times this year.  Plus, he's always calls first to ask how much he has contributed year to date (despite the fact that I've shown him where on the website to find that).  The guy is a per diem Doctor with variable hours.  It seems like he's always trying to project out his pay for the next month and then adjusting his withholding to match his income needs.  And in this same plan, another participant has changed deferral elections 7 times, and two more have done it four times.  At least those three don't bother me with questions on YTD deferrals.  

In the words of Jim Rome,:  Reee-diculuous.  Innnn-credible.  Aaaa-rugula.

[Bill Presson]

38 minutes ago, K2 said:

I have a plan where a participant has changed deferral elections 8 times this year.  Plus, he's always calls first to ask how much he has contributed year to date (despite the fact that I've shown him where on the website to find that).  The guy is a per diem Doctor with variable hours.  It seems like he's always trying to project out his pay for the next month and then adjusting his withholding to match his income needs.  And in this same plan, another participant has changed deferral elections 7 times, and two more have done it four times.  At least those three don't bother me with questions on YTD deferrals.  

In the words of Jim Rome,:  Reee-diculuous.  Innnn-credible.  Aaaa-rugula.

It happens.

 

(hope I spelled that correctly)