972.392.1143 |
972.934.1269 (Fax)
Articles

Two types of auto-enrollment mistakes

Auto-enrollment for 401(k) plans is increasingly a popular option. Recent data analysis by Charles Schwab shows that 42% of employers auto-enrolled in 2011. And, 92% of those employees stayed enrolled in the plan, continuing to save money for retirement. With many details to handle, sometimes plan sponsors lapse in fulfilling the auto-enrollment requirements for certain employees. This is a common error, and one that is fortunately easy to correct. However, there is a process and a formula to follow.  Below are the two types of auto-enrollment errors and the recommended fix:

1)      Failure to provide plan enrollment materials upon employee eligibility – When a plan doesn’t provide the materials, the employee doesn’t have the opportunity to elect to contribute an amount other than the automatic enrollment deferral percentage (ADP), including the option to not participate. Here is the formula to correct the error:

[total amount of salary during neglected period] x [percentage of ADP] x .5 (50%) = amount that company contributes to employee’s retirement account

2)      Failure to implement the automatic enrollment after completing enrollment materials – The employee is automatically enrolled at the specified ADP unless the employee indicates a different percentage (called an elected deferral percentage – EDP) or opts for zero, which is opting out of participation. If a packet is distributed to the employee and then the company inadvertently doesn’t deduct the requested contributions, the employee is entitled to the following formula for compensation:

[total amount of salary during neglected period] x [percentage of EDP] x .5 (50%) = amount that company contributes to employee’s retirement account

The amount of ADP may vary based on type of employee, such as highly-compensated employee vs. non-highly-compensated employee. Also, the company’s contributions should be adjusted for earnings starting on the date that the deferrals should have been made.

The plan administrator should work with the payroll provider to establish procedures and avoid negligence of contributions. In addition, employers should periodically review the records of employees who are not making elective deferrals to the plan. If the employee record doesn’t reflect a zero percentage elected deferral, it is likely that they are being neglected.

 

 

Tags: , , , ,