There are two phases to an employee’s eligibility for the plan:
1. A waiting period
a. Working for a specified period of time (up to 12 months)
b. Attaining a particular age (age 21)
2. The entry date
a. Typically this is a specific date following the waiting period (first of the month/quarter)
b. In some cases, the entry date can be retroactive to the beginning of the plan year
c. The first day of the plan year is always an entry date
Check your plan documents to make sure that you understand when your employees are eligible to enter your plan. If you can’t easily tell what your plan calls for, check with us and we will help you!
There are also two types of enrollment procedures:
1. Affirmative enrollment
a. The employer provides enrollment material or information to each employee prior to his/her entry date
b. The employee completes the election form (paper or online) and returns to the employer for processing.
c. The form includes the amount the employee wants to have sent to the plan each pay period, and
d. Investment elections (if the employee is allowed to select his/her own investments)
e. Beneficiary designations are also important to get at enrollment and any time there is a change to the employee’s family situation.
We recommend that you get an enrollment form back from every employee on or before his/her entry date and keep that information on file. For additional policies and procedures to provide pension help for business owners, just send us a request!
2. Automatic enrollment
a. The employer automatically enrolls an employee on his/her entry date.
i. Begin salary reductions
ii. Establish an account at the investment custodian (if applicable)
b. The employer must give to the employee information about the enrollment process 30-days before the entry date:
i. How much will be taken from each pay check
ii. What investments to which the funds will be deposited
iii. If the deduction will increase periodically when and by what amount
c. The employee has the option, under the automatic enrollment rules, to:
i. Opt out
ii. Change his/her deduction amount
iii. Change his/her investment selection
iv. Request a refund of contributions in the first 90-days
Most HR departments and office managers have this enrollment process down pat. But in the event that one participant is not offered enrollment trouble ensues.
The consequences that a business owner will face for failure to properly enroll an eligible employee are:
A. The employer must make a contribution to that employee’s account equal to 50% of the average deferral for all (non-highly compensated) employees.
B. The employer contribution will have to be made for every pay period that the employee missed participation in the plan (from his/her entry date, to the date of discovery).
C. The employer will have to make up interest lost since the employee did not have the opportunity to make contributions.
So in the event that one or two employees are missed, this may not be a huge expense. But we were asked to provide help to a business owner whose HR department failed to enroll dozens of employees under their automatic enrollment provisions. The correction for a 6-month period came to over $30,000!
All plan provisions are important, but some can be more expensive to fix in the event that protocol is missed. When asked to provide pension help to business owners, we recommend:
- Understand your plan provisions with respect to eligibility and entry
- Develop policies and procedures that are well documented so deadlines are not missed
- Get enrollment materials back from every eligible employee, even if they are electing to not participate
- Make sure that automatic enrollment procedures are followed precisely every time
- Call us at BRI if you want an evaluation of your internal procedures to help you avoid possibly costly mistakes!