On the surface, 401k plan eligibility seems simple enough. However, there are several rules and factors that trip many plan sponsors up in this area. One of the most common compliance failures can be on the first day an employee becomes eligible for the plan, and this amplified if your plan has relaxed eligibility requirements and your company is on a hiring binge.
Understand Your Plan Document
The first step is to have a full understanding of your plan’s eligibility requirements and the data that’s involved.
Assign Responsibility
If your plan has an hours requirement, who will be tracking hours? Will it be your payroll provider? What systems do they have in place to notify you of when someone becomes eligible for the plan?
Thankfully, our platform tracks hours that we receive in payroll data each payroll cycle. However, it’s crucial that we receive hours for all employees – not just those participating in the plan. A lot of employers assume that their payroll vendor or their 401k plan provider is tracking eligibility, when in fact, they’re not because they’re not receiving the data or because the payroll vendor’s system isn’t capable of tracking plan eligibility. Either way, it’s very important to make sure that one of your vendors has this covered.
What You Should Expect
The best experience is for your 401k plan provider to manage this by receiving payroll data for all employees. It allows your provider to do their job, which is managing the plan. It also allows your 401k plan provider to handle delivering the required notices and disclosures that an employee must receive before participating in the plan. This is something your payroll provider probably isn’t set up to handle. Plus, it’s best for your 401k provider to work with your employees on enrolling in the plan through their workflow channels.
At ERISA, we have an email campaign that gets automatically triggered to your employees when our system calculates an eligibility date that’s approaching soon. This email campaign provides your employees with reasons they should save for retirement and instructions for signing up in the plan.
Ways to Simplify Eligibility
Let’s say that hours of service won’t work for your company because it’s too difficult to track that data. Your plan can be set up to only require employees work for your company for a certain period of time before becoming eligible for the plan. This is known as an “Elapsed Time” method that works great for small businesses or companies with a lot of salary employees. This is the easiest eligibility method to manage for your HR team and your 401k plan provider. Hours of service for eligibility is best-suited for companies with high turnover or for companies that utilize seasonal workers and interns.
The key things to remember when dealing with your plan’s eligibility are…
- understand your plan’s provisions
- determine if they make sense for your business
- establish clear responsibilities for this with your service providers
Have more questions? Contact us and we’ll be glad to help!