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Transforming Employees into Participants

In the last decade, plan design discussions on 401(k) plans have often centered on automatic plan features, which is due to the higher participation and savings rates they create for our clients’ workforces. But there are other topics within plan design that are meaningful and have an impact on participants and plan sponsors — and one of them is plan eligibility.

In the article “Making Participants Out of Employees Via Eligibility,” which appeared in the Summer 2016 issue of Plan Consultant, Noah Buck argues that a strategic approach to defining eligibility provisions in 401(k) plans can boost take-up rates.

The eligibility rules of a 401(k) plan have significant implications for plan sponsors. These rules can affect benefit costs, talent recruitment and retention, administrative complexity and plan compliance, Buck says. “As consultants, we can help plan sponsors take a strategic approach to defining eligibility provisions in their 401(k) plans, with consideration given to various plan objectives and statutory requirements,” he argues.

The Parameters

“It’s typical for plan sponsors to define the eligible population as their common law workforces, with specific provisions to exclude certain employees such as nonresident aliens with no U.S.-source income, union or nonunion employees, commissioned employees or leased employees,” Buck says. He adds that plan sponsors also may exclude certain job categories as long as that is not a way to get around the minimum statutory age and service requirements. “A plan’s eligibility rules are subject to coverage testing under Code Section 410(b) to ensure they are not discriminatory against non-highly compensated employees,” he writes.

“The longest a plan sponsor can typically make an eligible employee wait to satisfy eligibility and enter a plan is between 12 and 18 months,” says Buck.

Strategy

Buck offers the following suggestions on the strategy that can be followed in making employees participants:

Employers relying partially on their 401(k) plans for recruitment should consider that quicker and easier access to the plan will be more attractive to those in their prospective talent pools.

It’s important to consider the plan’s vesting provisions.

If the plan has immediate vesting, the employer matching contributions — meant to supplement long-term retirement savings — could be going right out the door to short-term employees who are allowed to enter the plan too quickly.

Employers should consider structuring eligibility and plan entry provisions so employer contributions are more likely to stay in-house with longer-term employees.

Aside from the actual benefit provided to employees, an organization can also be strategic with its enrollment experience. It can be difficult to engage employees on their benefits.

The enrollment experience needs to be carefully considered by organizations using automatic enrollment.

Plan sponsors should avoid gray areas or knowledge gaps regarding the administration of eligible employees.

An organization may want to let some employees enter the plan right away, but require others to meet a more stringent eligibility requirement (assuming coverage testing will pass).

A plan sponsor may allow immediate plan entry with respect to 401(k) deferrals, but assign a longer eligibly period for employer matching contributions.

“Plan eligibility provisions within 401(k) plans can have a significant impact on our clients and their employees,” says Buck. “Injecting strategy into this area can help our clients contain benefit costs, recruit and retain talent, simplify administration, and stay in compliance with the law,” he adds.

To view the article, “Making Participants Out of Employees Via Eligibility,” click here. And to download a pdf of the entire 68-page summer issue, click here.