Letting some NHCEs in early by name

I know that it is an allowed correction to let participants stay in a 401(k) plan if they were accidentally let in early, but would it be allowed to amend (prospectively) to let one employee in early by using his actual name in the eligibility waiver section of the document?  My opinion is that it could be discriminatory towards the other employees that were NOT let in, and I advised they do a waiver for all if they want to allow him in, but they don't want to do that.  This is an NHCE, but still doesn't seem allowable to me. 

I don't see how a amending the plan prospectively is going to help an NHCE who already entered the plan too early.  Doing it retroactively only complicates matters.

Keep in mind that all employees have a right to ask for a copy of the plan document and all amendments, and also should get a Summary of Material Modifications for any plan amendments.  Any employee who asks for a copy will know who was let in early in the NHCE is named in the amendment.  The company cannot keep this a secret.

You do not indicate if there is a an associated match that the NHCE could receive that would need to be addressed.

The company should keep in mind that typically there are fees associated with amending the plan.  They should be relatively minimal, but the company should consider the cost in their decision-making.

Frankly, the best approach is to give a refund of the deferrals to the NHCE.  They can save the refund and when they do become eligible, they can contribute a higher amount to make up for lost time.  Then everybody plays by the same rules.

Accommodating an early entrant generally is not a good reason for complicating the plan document, payroll, and plan recordkeeping.  The company needs to own having made a mistake and should tighten its procedures to not let in early entrants.

This NHCE was not let in already, they want to amend the plan to let him in early as of 7/1/2025, before he meets the 1 year eligibility requirement that everyone else has to meet.  They cited that because it is an allowed SCP correction to let an employee in early by name after the fact, that it must be okay to let only one in by name on purpose. 

As with many answers in this forum, even if you CAN do something doesn't mean you SHOULD do it. Can they do this? Yes. Whether or not they should is an overall HR/employee relations issue that should be considered.

As with MANY inquiries from the sponsor/client/company, it's often best to ask questions, such as:

• Why do you want to do this? 
• What is special about this situation?
• What is special about this person?

There may be more than one way to solve a problem.  Maybe I sound like a broken record, but I'm just asking you to act like a consultant.

If this is for one NHCE only, is there a scenario in which crediting of prior employer service might work?

I would be curious to know how many employees there are.  If this is a big company with hundreds of employees, you just can't do something like this.  You must assume that what you did will become known. And then the client is exposed to accusations (perhaps) of all sorts of motivations for benefitting one employee and not the other (I assume you can use your imagination for what someone could conjure  up).

What are the rules for the SMM?  I thought they only went to the affected participants.

For example, if you were adding a loan provision, you do not need to send it to terminated employees. 

3 hours ago, BG5150 said:

What are the rules for the SMM?  I thought they only went to the affected participants.

For example, if you were adding a loan provision, you do not need to send it to terminated employees. 

The SMM might technically only need to go to the one person let in early, but as a part of the full plan document, a very ambitious employee could of course request access to it.  (Likely? No, until it happens.)

Just a note:  if you accidentally let an NHCE in the plan early, EPCRS permits you to amend the plan retroactively to lower the eligibility requirements for that one person.  So, there is precedent to permit the kind of amendment you are doing. 

I would beware, however, of situations where you have plans that are combined for testing, because you need to do coverage testing taking into account people who could have been eligible if they were in a permitted class and consider them to be excluded.  So, the question becomes, if you let in a guy with a 6 month wait, and the plan normally has a 1 year wait, and you are doing coverage testing, do all the other employees (including NHCEs and HCEs) who have 6 months to 1 year of eligibility service become "nonparticipating"?

Also note that if you allow a specific employee to enter the plan early by naming them (or anything to that effect), you must pass coverage testing using the ratio percentage test as the plan does not satisfy the reasonable classification component of the average benefit test.

On 7/1/2025 at 8:27 AM, austin3515 said:

I would be curious to know how many employees there are.  If this is a big company with hundreds of employees, you just can't do something like this.  You must assume that what you did will become known. And then the client is exposed to accusations (perhaps) of all sorts of motivations for benefitting one employee and not the other (I assume you can use your imagination for what someone could conjure  up).

I was thinking about the number of participants.  If the plan is subject to audit, even if there are 1,000 participants, Murphy's Law says there is a 99% chance, this person will be part of the auditor's random selection.

I'm dealing with a similar issue just today!

Client has 401k plan with a match (25% to 6%). Eligibility is 1 yr. They're hiring a regional manager who will earn 190k. Since he's only being hired now (effective Aug. 1), it is my understanding that he won't be HCE in 2025 or 2026. Any problem amending to allow him in immediately? Is it better to allow him in by Job Classification, or is specifically naming him in an Amendment OK? 

I'm unsure of the answer, but it bugs the crap out of me.  (OK, that's not the technical terminology.)

My response is, if you want to do this for someone who will (later) be a HCE, why wouldn't you do the same thing for any new hire?  Why not treat everyone the same, but (maybe) change the eligibility to something more generous (such as first calendar quarter following DOH)?

I have an email that I saved from Charles Lockwood (RIP) from 2013 where I asked a silver support question about waiving for a participant by name due to being let in early. His reponse:

"There is no limit on the ability to retroactively amend the plan to waive the eligibility requirements based on the intent on the ER. As long as the EE is an NHCE, you can amend the plan to waive participation for the specific individual, regardless if the ER intentionally allowed the EE into the plan".  

I always took his word as gospel to be honest.  

It is a bit hard to justify that you can do almost anything to fix a mistake as opposed to doing a prospective amendment.  Sometimes I have wished clients had not asked me a question, and just done it wrong, and then it would have been obvious that a plan amendment to accomplish the objective was available... but that is an important distinction here, EPCRS corrective amendments versus well thought and planned amendments.