Starting and stopping deferrals in a 401k Plan

[Pammie57]

Client's plan document has entry dates of 1/1 and 7/1, and it says that changes to deferrals can be made on entry dates.  Several participants stopped their deferrals during this COVID pandemic, and now what to re-start them before 1/1/2021.  Has something changed on this topic, and CAN they start again next payroll?  I don't see anything in their document that says they can re-start at any time, but is that a given?  Thanks!

[Bird]

If the plan says that changes to deferrals can be made on entry dates (and presumably only on entry dates; I can't imagine it saying that and then somewhere else saying "oh but you can change any time"), I'd say you have answered your question.  

But that is easily amended.  FWIW I've never seen the rationale for limiting changes.

[Larry Starr]

5 hours ago, Pammie57 said:

Client's plan document has entry dates of 1/1 and 7/1, and it says that changes to deferrals can be made on entry dates.  Several participants stopped their deferrals during this COVID pandemic, and now what to re-start them before 1/1/2021.  Has something changed on this topic, and CAN they start again next payroll?  I don't see anything in their document that says they can re-start at any time, but is that a given?  Thanks!

Client's plan is poorly designed if it only allows changes on entry dates, since a participant has only ONE entry date ever which means he can't ever change it!  Probably doesn't actually say that (the words we use do matter, especially in our business). Maybe it says it allows changes only on 1/1 and 7/1, but that is just a bad design.  Amend plan to allow changes at any payroll date; why not?????

[MWeddell]

Treas. Reg. Section 1.401(k)-1(e)(2)(ii) requires that a 401(k) plan give participant to opportunity to change their elective deferral contribution elections at least once during each plan year.  So it's awfully unlikely that the plan says what Larry initially suggests above.

[Larry Starr]

2 hours ago, MWeddell said:

Treas. Reg. Section 1.401(k)-1(e)(2)(ii) requires that a 401(k) plan give participant to opportunity to change their elective deferral contribution elections at least once during each plan year.  So it's awfully unlikely that the plan says what Larry initially suggests above.

Of course it does!  Yes, that was exactly my point, that the quoted language is almost definitely NOT what the document actually says.  I don't like having to guess at what the plan really says when the OP provides less than exact language. Our business is one of details making a difference.

[Patricia Neal Jensen]

If it does not say, they can change/ re-enter anytime, amend the plan so that it does!  The fact is, we have found, that participants don't do this as often when they know they can do it whenever.

[Bill Presson]

16 hours ago, Patricia Neal Jensen said:

If it does not say, they can change/ re-enter anytime, amend the plan so that it does!  The fact is, we have found, that participants don't do this as often when they know they can do it whenever.

I tell clients this all the time and some refuse to believe me.

[Larry Starr]

5 hours ago, Bill Presson said:

I tell clients this all the time and some refuse to believe me.

Interesting, I tell my clients the same thing. But I say it this way:  "Now, we are going to include a provision in the plan that allows participants to change their election with any payroll. When we first starting doing 401(k)s 100 years ago, we limited the change in election for deferrals to quarterly only.  Ultimately, we (and the industry) changed to allowing participants to change any time they want, and we (and the industry) found that we actually get FEWER changes during the year. The reason is that when people know they can change with any pay period, they don't have to "worry" about whether they can continue their deferral for the next 3 months or not, just one pay period, so there is much  less concern and, therefore, much fewer changes by participants.  In addition, you don't have to keep reminding them every quarter that they are coming up to a "change date" and they need to decide if they want to make a change; that also eliminates substantial stress in your employees' minds". 

I have to say we have never had one client go with anything other than allowing changes with every payroll period.

[shERPA]

49 minutes ago, Larry Starr said:

Interesting, I tell my clients the same thing. But I say it this way:  "Now, we are going to include a provision in the plan that allows participants to change their election with any payroll. When we first starting doing 401(k)s 100 years ago, we limited the change in election for deferrals to quarterly only.  Ultimately, we (and the industry) changed to allowing participants to change any time they want, and we (and the industry) found that we actually get FEWER changes during the year. The reason is that when people know they can change with any pay period, they don't have to "worry" about whether they can continue their deferral for the next 3 months or not, just one pay period, so there is much  less concern and, therefore, much fewer changes by participants.  In addition, you don't have to keep reminding them every quarter that they are coming up to a "change date" and they need to decide if they want to make a change; that also eliminates substantial stress in your employees' minds". 

I have to say we have never had one client go with anything other than allowing changes with every payroll period.

And I tell them the same thing.  If they know they can change at any time, no one gets worked up about it.  

[Bill Presson]

1 hour ago, Larry Starr said:

Interesting, I tell my clients the same thing. But I say it this way:  "Now, we are going to include a provision in the plan that allows participants to change their election with any payroll. When we first starting doing 401(k)s 100 years ago, we limited the change in election for deferrals to quarterly only.  Ultimately, we (and the industry) changed to allowing participants to change any time they want, and we (and the industry) found that we actually get FEWER changes during the year. The reason is that when people know they can change with any pay period, they don't have to "worry" about whether they can continue their deferral for the next 3 months or not, just one pay period, so there is much  less concern and, therefore, much fewer changes by participants.  In addition, you don't have to keep reminding them every quarter that they are coming up to a "change date" and they need to decide if they want to make a change; that also eliminates substantial stress in your employees' minds". 

I have to say we have never had one client go with anything other than allowing changes with every payroll period.

That's almost a direct quote from what I say. But some are still convinced it will mean more work. Not many, but a few.

[Larry Starr]

21 hours ago, Bill Presson said:

That's almost a direct quote from what I say. But some are still convinced it will mean more work. Not many, but a few.

Bill, I don't know WHY they always go along, but I don't really offer it as an option.  I tell them that is what we are doing and that's it.  I also have a problem with a client who has no good reason for NOT following my advice; that may be a client that I will dump because I am their consultant and if they don't take my advice  here, they may not be a good client in the long run.  The problem is they think they know better than me, and that's a real problem if I can't get them over that hump.  I don't have any desire to be arguing with them in the future.  Now, there are lots of things that I would PREFER, but sometimes the clients actually do have a reasonable reason for what they want (for example, we have few plans that have loans, but the ones that do had "acceptable" - to me - reasons for why we needed to add that provision and do loan documentation, so not the same problem as in this example).

FWIW.

[Belgarath]

On 7/31/2020 at 4:24 PM, Bill Presson said:

But some are still convinced it will mean more work. Not many, but a few.

We also have a few (very few) holdouts on this. Typically it is bad memories of an incompetent payroll service (or in-house payroll administrator) who constantly screwed up deferral changes and caused a lot of work/expense to fix. 

[Larry Starr]

8 hours ago, Belgarath said:

We also have a few (very few) holdouts on this. Typically it is bad memories of an incompetent payroll service (or in-house payroll administrator) who constantly screwed up deferral changes and caused a lot of work/expense to fix. 

That's perfect:  "You came to us BECAUSE your previous experience with "BIG Payroll Incompetent Company" was a problem.  We make sure you don't have those problems.  We are your retirement experts now and we know how to run these plans.  You want fewer problems?  DO IT OUR WAY."

Larry.

[Belgarath]

They trust us. They just don't trust their payroll service!

Kudos to you if 100% of your clients do exactly what you recommend. Our percentage isn't quite that high.

[Larry Starr]

19 hours ago, Belgarath said:

They trust us. They just don't trust their payroll service!

Kudos to you if 100% of your clients do exactly what you recommend. Our percentage isn't quite that high.

Ah... but we also change most of our clients to our favored payroll service, which also happens to be a client of ours (but we were a client of their for many years before they became ours and we still recommended that everyone switch. We actually have capability to enter their data system and pull all the payroll info that we need, so that makes the client's lives easier, and that's one very large selling point. FWIW.

[Belgarath]

Nice!