Do we have a problem with different subsidiaries administering Catch-Ups differently?

[ERISA-Bubs]

All subs participate in the same 401(k) plan, which includes catch ups.

In Sub 1, all catch-up eligible participants have their contribution limits automatically increased at the beginning of the Plan Year.

In Sub 2, all catch-up eligible participants are given notice that they need to actively elect catch-up.  They are given a notice at the beginning of the year and a follow-up mid-year.

Accordingly, if someone in Sub 2 elects to defer 6% of comp, and that equals $30,000, they will be cut off at $22,500 unless they have actively elected catch-up.  That same employee in Sub 1 would have the full $30,000 contributed, without ever having elected catch-up.

We plan to make all catch-up administration consistent for future Plan Years, but what about this Plan Year?

Is this a problem?

If we change administration this year, does that create a problem where we otherwise wouldn't have one?

If this is a problem, what is the solution?

 

[Lou S.]

I'm not sure it's a problem. It sounds like an administrative procedures by SUB issue.

It sounds like everyone has the effective ability to make catch-up, it's just some have to affirmatively elect on a year by year basis and others get it automatically.  It's not ideal and it sounds like you are taking steps to make it uniform but I'm not sure it's a problem if SUB1 and SUB2 have clearly documented administrative procedures that have been uniformly followed.

 

[ERISA-Bubs]

28 minutes ago, Lou S. said:

I'm not sure it's a problem. It sounds like an administrative procedures by SUB issue.

It sounds like everyone has the effective ability to make catch-up, it's just some have to affirmatively elect on a year by year basis and others get it automatically.  It's not ideal and it sounds like you are taking steps to make it uniform but I'm not sure it's a problem if SUB1 and SUB2 have clearly documented administrative procedures that have been uniformly followed.

 

Thanks Lou!  Do you see any problem if there are no clearly documented administrative procedures?  In other words, the procedures are the same for the entire plan and for all subs, but don't go into this level of detail on catch up processing and so neither Sub can be said to be violating the procedures?

[Lou S.]

I'm really not sure. I'd be concerned if there are a lot of HCEs getting the catch-up in the SUB where it is automatic and a lot of NHCEs getting limited to 402(g) in the other SUB. That is worst case you have a potential BRF to test. Best case it's a non-issue. But honestly it is not something I've seen before or considered.

I think if you have documented HR procedures from each SUB on how they handle it, you are probably fine, even if the document procedures are lets say a bit more generic.

With the usual disclaimer that I am not an ERISA attorney.

 

 

[Peter Gulia]

Beyond considering points about tax-qualification conditions, consider whether each subsidiary's plan-administration method was (i) stated by the plan's governing documents; (ii) at least a plausible interpretation of the plan's governing documents; or (iii) contrary to or otherwise inconsistent with the plan's governing documents.

[Paul I]

This situation sounds as if each Sub is uses different payroll providers or at least have different payroll rules.  Sometimes payroll departments implement procedures based on what is expedient for payroll without seeking input from benefits departments.  There may even be different HR systems feeding into these payrolls.  If this is the case, then the HR/payroll documentation likely will explain how each sub wound up with different procedures. 

The situation with Sub 2 sounds like each participant needs to make a catch-up election each year while the elective deferral election remains in force year over year.  This is counterintuitive to the way most systems are set up.  One would expect there would be a standing elections for elective deferrals and for catch up contributions.  Requiring affirmative elections every year increases the risk of having failures to implement elections.

Having the Sub 1 catch-ups automatically increase suggests that the plan may have an auto-increase provision.  If the plan does have an auto-increase provision and it is not applied to Sub 2, then there is a problem.  If the plan does not have an auto-increase provision, the there would have to be a participant election made by Sub 1 participants to make the "maximum available catch-up contribution" to support the auto-increase that takes place.  That would beg the question of why this max available election is not offered to the Sub 2 participants, which gets into a nuance of the availability of the election.

• See if the plan, SPD, or administrative policies have any governing language. 
• Review the instructions on any participant election forms or related communications. 
• Find out why the systems were set up the way they operate. 

Any disconnects among these sources should help answer whether there is a problem.

[ERISA-Bubs]

Thank you all!