We just drove past it.
The “it” is the March 15 deadline for 401(k) testing to determine whether Highly Compensated Employees (“HCEs”) contributed more than the IRS allows when compared to the Non-HCEs.
Looking back, some 401(k) plans passed. Other did not. The ones that did not had some decisions to make. They could
- Return the excess deferrals to the HCEs, or
- Make a fully vested contribution called a Qualified Non-Elective Contribution (“QNEC") to Non-HCEs in an amount sufficient to pass the 401(k) discrimination test
It could be an easy decision. Take the case of one employer who who had the choice of 1) returning approximately $17,000 in excess deferrals plus earnings to the HCEs; or 2) making a $150,000 QNEC contribution to NHCEs. The decision, of course, was Option 1.
For other employers, the options could be reversed. That is, a relatively small QNEC eliminates the need to return any contributions to the HCEs.
And for other employers, some place in between.
That was 2013 in the rear view mirror. Time to consider the road ahead and what can be done to avoid returning 401(k) contributions to the HCEs. Here are a few options for employers in this situation to consider:
Safe Harbor Contribution
Subject to IRS rules, an employer can automatically pass the 401(k) discrimination test, i.e., no returns to HCECs, if the employer makes one of two kinds of safe harbor contributions. Either 3% of compensation to all eligible employees, or a matching contribution of 100% up to the first 3% of contributions, 50% up to the next 2% or contributions with a 4% maximum.
Unfortunately, it would also be looking in the rear view mirror for 2014. In order to have a Safe Harbor plan, an employer must provide notice to the employees not more than 90 days, nor less than 30 days prior to the start of the plan year. Thus, December 1, 2014 is the notice deadline to have a safe harbor plan in 2015.
Targeted Employee Communication.
The objective here, of course, is to increase participation by the Non-HCEs to minimize or eliminate returns to the HCEs. This may require different communication methods based on the specific demographics of the plan. It may not be socio-economics that drives the communication methods. It may be generational. For the first time in our history, there are four generations in the workforce.
Simply stated, the employer automatically enrolls employees at a specific contribution level. While employees have the option to opt out, only about 10 actually do. Part of the Pension Protection Act of 2006, automatic enrollment has been slow to catch on with the employers. But, with the growing realization that retirement readiness is a significant problem, more employers are adopting it.
Implementing automatic enrollment doesn’t have to be a daunting process. It can be made simpler using resources available from the aptly named Retirement Plan Simpler.
There are no guarantees that either targeted employee communication or automatic enrollment will be successful in increasing employee participation. But even if either one increases employee participation by just a little bit, that’s not such a bad thing is it?
Any resemblance between this March 15 and the Ides of March is purely coincidental.