Are You Including All Eligible Employees in Your 401(k) Plan?

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by Stacey L. Spencer, QKA | Manager, Employee Benefit Services Group

There are many ways mistakes are made when it comes to administering a 401(k) plan. Keeping up to date on the regulations, while trying to do your ‘real’ job, can result in overlooking basic administration duties. The IRS has identified that one of the most common mistakes employers make is making certain that all eligible employees have been given the opportunity to make an elective deferral election. Sounds pretty basic…

Your plan document should contain a specific definition of “employee” and provide requirements for when employees become plan participants eligible to make elective deferrals into your 401(k) plan. Employers sometimes assume the plan does not cover certain employees, such as part-time or seasonal employees. Another common error is that employees who elect not to make elective deferrals are mistakenly treated as ineligible under the plan when contributions to the plan are made and tests are run. To reduce the risk of omitting eligible employees, you should ensure employee data such as dates of birth, dates of hire, dates of termination, number of hours worked, compensation for the plan year, 401(k) election information and any other information necessary to properly administer the plan are accurate and provided for all employees.

As a general rule, each employee who receives a Form W-2 should be treated as an eligible employee unless they can be properly excluded by the terms of the plan. You should use the plan’s definition of an eligible employee along with the plan’s age and service requirements to make a determination of eligibility of each employee receiving a Form W-2. This can be a simple process; however, if you use leased employees, contract labor or have shared ownership of other business organizations determining eligible employees can be more complicated.

In addition to identifying eligible employees, you must also give them the opportunity to make a salary deferral election. You should have procedures in place to notify these employees of their eligibility and how and when they may participate.

Finally, you should have proof you offered all eligible employees the choice to participate in the 401(k) plan. If you are set up properly for electronic notification and election, then you should have proof the employee was given the opportunity to defer. If you are using paper forms, you should have any participant who declines to participate complete a Deferral Election Form and indicate that they do not wish to defer.

If you determine that you have included an ineligible employee or did not provide an eligible employee the opportunity to defer, then you must make a correction to the plan under one of the IRS’s correction programs.

Greenwalt CPAs can assist you in determining eligibility and correcting any past mistakes. Please contact Stacey L. Spencer in our Employee Benefits Department at 317-260-4421 or sspencer@greenwaltcpas.com.