Managing your company’s 401(k) plan is no doubt a difficult task. There are many rules and regulations that must be followed, and as fiduciary of a 401(k) plan, you have certain responsibilities that are required under ERISA. When something is missed it can have an impact on a plan participant’s savings opportunity.

Automatic enrollment is becoming an increasingly popular feature in 401(k) plans. This allows employees to be automatically enrolled at an established deferral rate when they become eligible for participation. While this is a great way to increase participation, it is important that the plan sponsor understand the risks in the event of noncompliance. To help you understand these risks and steps necessary for correction, we have provided two common examples of errors and necessary steps for correction.

Late Enrollment

On January 1, 2014, Larry became eligible to participate in the company’s 401(k) plan. In November 2013, the plan sponsor provided him information on the 401(k) plan. Larry did not take any action as he was happy with the automatic enrollment deferral rate of 3%. On the first day of the year the required automatic enrollment did not occur. As a result, Larry did not have any deferrals for all of 2014. He earned $50,000 in income during 2014.

Early Enrollment

Carlos became eligible to participate in the company’s 401(k) plan on July 1, 2014. However, due to an administrative error, he was enrolled early on January 1, 2014 at the automatic enrollment deferral rate of 3%. Carlos earned $40,000 in wages and he had deferrals of $1,200 ($40,000 x 3%) in 2014

Fixing the Errors

Late Enrollment

Larry missed the opportunity to make any elective deferrals since he was not automatically enrolled. Remember, he doesn’t need to complete any paperwork to be enrolled at the set deferral rate. The plan sponsor is required to make a corrective contribution for the missed deferral plus lost earnings. In this case, the amount would be $1,500 ($50,000 earnings x 3%) plus lost earnings, to make up the amount that his deferrals would have appreciated if timely invested in the plan’s funds.

Early Enrollment

Carlos contributed too much to the plan because he was enrolled before he was eligible. The plan should make a corrective distribution for these excess deferrals together with earnings. In this case, Carlos will receive a distribution in the amount of $600 ($40,000 earnings x 3% x 50% for half the year) plus earnings on the excess deferral up to the time it is corrected. 

Identifying Errors

The plan sponsor should implement internal controls to prevent and detect these types of errors in the first place.  This is important because in most cases, the plan sponsor is liable for the correction, not the participant.  If an error is not detected for a number of years, the correction could be material and lead to other compliance issues. The plan sponsor should routinely review plan records, identify eligible employees who are not contributing to the plan, and verify whether they opted out of participation. Remember, participants should be automatically enrolled unless elected otherwise.

Contact Us

Are you looking for assistance with a plan administration issue? There is a myriad of regulations that plan sponsor must comply with to keep the plan operating properly. Barnes Dennig is here to help! For additional information on plan administration or 401(k) plan audits, contact us at 513.241.8313, or click here for email. We look forward to speaking with you soon.