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Enrolling Participants in Your 401k Plan
Planning an Employee Communications Strategy
Planning and Conducting Enrollment Meetings
-- Planning the Meeting
-- Materials You'll Need
-- Guidelines and Agenda
-- Automatic Enrollment
Entering Employees into the Software Database
-- Setting Up the Database
-- Entering Enrollment Application Information into the Database
-- Entering Prior Year's Wages into the System
Planning an Employee Communications Strategy
Before you can expect people to join the 401k plan, you're going to have to make them aware that it exists; moreover, you must make them aware of the general and specific benefits that participating in it affords. In other words, you're going to have to “sell” the plan to your fellow employees. It shouldn't be a hard sell, though, considering your product. A 401k plan is a great benefit!
We've included a number of documents, as listed at the top of this page, to help you promote your company plan to your co-workers; the documents are housed within your 401k plan administration software under Reports. Your plan administration software package also includes a video slide presentation that you can present at the enrollment meeting, or extract information from to add to your own presentation.
Planning and Conducting Enrollment Meetings
Some companies like to hold one big open enrollment meeting for all eligible and potentially eligible employees (such as those who are shy of the age or length of service requirement, for example, but will become eligible in the near future). Other companies prefer to meet with smaller groups, or even to brief individual employees. Other companies do all three. You can do whichever seems best for your company.
Promoting participation in the plan doesn't end with the initial enrollment meeting, however. You will continue to contact and educate newly-eligible and eligible-but-not-participating employees about the merits of the plan and participation in it.
How you go about explaining the vital information to your employees is up to you — but remember, your plan's health and livelihood depend on a participation pool that's balanced in the eyes of the IRS (see “Compliance Testing” in Chapter 8). It's your job to make sure a sufficient portion of eligible rank-and-file employees join the plan.
401K Tip:
ERISA requires plan administrators -- the people who run plans -- to give plan participants the most important facts they need to know about their pension plan. A typical small employer, Target Labs in California, (www.targetlab.com) uses pre-approved prototype documents for its plan. Some of these facts must be provided regularly and automatically by the plan administrator. Others are available upon request, free-of-charge or for copying fees.
TIP… Before planning your meeting, review the video slide presentation, which addresses the following points in detail.
As Plan Administrator, you are the primary information source about the company plan. Before and during the enrollment meeting, you must impress upon the employees a number of important points, most notably the following:
1. The tremendous need for personal retirement planning (the spiraling descent of Social Security, the current lack of adequate personal retirement savings)
2. The basic benefits of participating in a 401k plan (deferred income taxation, the compounding effect of tax-deferred investing, the 401k's relatively high annual contribution limits, the bonus of any matching contributions being made by the company. . .)
3. How easy participating is (automatic salary deferrals, flexible contribution amount/deferral percentage, flexible investment selections)
4. That people can access their 401k money — via a 401k loan or a hardship withdrawal — before they reach retirement, but that doing so has a compounding negative effect on their final balance, just as deferring a little more money into the 401k each month has a compounding positive effect that can really add up over time!
5. What your company plan offers (specific investments, loan provisions, matching provisions, vesting provisions, as applicable)
Specifics of your presentation may include the following points:
• That a 401k plan is an IRS-sanctioned “tax-deferred retirement savings plan.” Participants don't pay federal income tax (nor often state income tax) on anything they have their employer divert into the plan, or anything the employer chooses to contribute to participants’ accounts, or any investment returns the accounts earn, until the money is withdrawn from the plan (usually at the participant's retirement).
• That deferring the payment of income taxes until later in life has two benefits: (1) the tremendous savings potential created by the compounding effect of tax-deferred savings, and (2) a likely lower total income tax assessment after retirement because the person will then probably be in a lower income tax bracket than during his or her working years.
• That the idea is to leave money in the 401k until the employee reaches at least age 59 1/2, and there are substantial early withdrawal penalties (plus income tax assessments)
• That if employees need to access their 401k money they can, either in the form of a 401k loan, which is sort of borrowing from themselves but which does bear a reasonable rate of interest, or in the form of a hardship withdrawal, which doesn’t have to be paid back and so doesn’t bear any interest, but which does involve substantial early withdrawal penalties and income taxations that can eat up close to half the withdrawal. Furthermore, a participant cannot choose to take a hardship withdrawal if he or she can qualify for a 401k loan; hardship withdrawals must be a means of last resort.
• That 401k loans are popular with participants. They believe it’s nice to know they have access to their money if they genuinely need it. But 401k loans do negatively impact the final account balance: the same compounding effect that bolsters 401k accounts also magnifies any breaks in the income stream into the accounts.
TIP…The standard loan application in the Loan Pac produced by your 401k plan administration software is designed to limit loans to only serious financial needs such as home purchase (or to prevent foreclosure), education, medical, or disability needs. We strongly encourage employers to adhere to such a standard for loans and not liberalize lending criteria. The statistics on 401k loans are dismal, and many loans fall into default because they are not repaid prior to the borrower's leaving the company, creating a financial liability for the borrower and extra paperwork for the Plan Administrator. Avoid unnecessary headaches: Keep borrowing to a minimum.
• That participation is completely voluntary. The employee chooses whether or not to participate. The employee chooses how much money to divert into his or her 401k account, either as a flat amount per month or a percentage of monthly earnings.
• That participating in a 401k makes saving money easy: the money is deducted automatically from the participant's pay before the person receives his or her paycheck, helping the person save money he or she might otherwise spend.
• That 401k money is portable. That is, if participants leave the company for any reason, their 401k money goes, too: they can simply withdraw it — but they'll be hit with early withdrawal penalties and IRS income tax withholding — or they can protect their accounts’ tax-deferred status by transferring them into their new employers’ 401ks or into an IRA, where the money can continue to grow and compound tax-free until they retire. The latter choice is called an IRA rollover. Participants can roll money they've accumulated in other retirement savings plans over into the current 401k, too.
• (Optional) That the company will be contributing to participants’ accounts, too. That means even more money compounding in participants’ accounts through the years! These contributions are called matching contributions and they'll be made at a rate of (fill in your company's matching formula).
• That matching contributions are designed to reward lasting employment with the company. To this end, many sponsors require a few years of being with the company before the matching contributions are 100% the participant's property. This is called “vesting” and it only affects someone if he or she leaves the company before the time at which matching contributions are 100% vested. The vesting formula being applied to matching contributions is (fill in your company's vesting formula).
• That all 401k participants will receive two monthly statements, one from the company (which your plan administration software compiles for you) and another from the investment account company mailed directly to their home address. The Plan Administrator will also receive a copy of the statements mailed to the participants’ home addresses.
• That participants have several investment options open to them, that the family of investments being offered through the 401k plan offer a diversity of investment goals.
• That investors should always read investment prospectuses before putting any money into an investment.
• That there are three principles to good investing: (1) diversification; (2) selecting investments that fit the employee’s personality, goals, and temperament; and (3) maintaining a long-term perspective (for instance, investors may actually benefit if investment values fall, because it means they can buy more shares per dollar now and if the value rises in the future those shares will be worth more. This concept of purchasing investment shares at lower prices is called dollar cost averaging.)
• That 401k investments are long-term investments: the market will go through bumps and glitches, but, over the long-run, things tend to even out.
• That 401ks are flexible: a participant can change investment selections or percentages and/or deferral amounts as time passes and needs change.
• That some investments companies expect participants to keep their money in the investment for a minimum amount of time. If they pull it out (for a 401k loan, for instance) before this time has elapsed, the investment account company may charge an exit fee. Any such fee is generally the responsibility of the participant to pay, and is clearly spelled out in the investment prospectus -- which is just one reason to carefully read each prospectus before investing any money.
• That some investment companies set minimum amounts on monthly contributions ($50, for instance). If the investment companies your company has chosen for its 401(k) plan use investment minimums, the enrollment meeting is a good time to make potential participants aware of such minimums.
• That most investment account companies don’t charge any exit fees if the participant is just moving money from one portfolio to another within the same family of funds, say from a stock-based John Hancock portfolio into a John Hancock bond portfolio.
We touch on each of the above topics in the enrollment meeting literature housed within your 401k software. The particular document names are listed at the top of this page and can be accessed via the Reports functions of your 401k administration software.
If you have not already done so, you should familiarize yourself with the contents of each of these items before passing them out to employees.
A lot depends on the level of enthusiasm of the prospective participants, and how much they were involved in the choice to have a company 401k plan. The more they already know about 401ks, the easier your enrollment meeting will be. You might wish to prepare them by sending out packets of material to each employee several times prior to the first enrollment meeting (varying the information in each packet sent), and of course advertising the whole subject of 401ks in your company newspaper and on bulletin boards throughout company facilities.
The fact that you already have contracted for a your plan administration software plan means that your company believes it will be popular and well received (otherwise the company never would have spent the money). But don't assume the employees know all there is to know.
Table 3-1 gives you some guidelines for conducting an enrollment meeting, large or small; Table 3-2 is a suggested agenda.
| Table 3-1. Enrollment Meeting Guidelines |
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In preparing to conduct a 401k enrollment meeting...
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| Plan the meeting well in advance. |
| Decide if you want one big meeting or a series of smaller ones. Big meetings allow you to disseminate the same information to everyone at the same time, and everyone hears the same questions and answers; smaller meetings, on the other hand, allow more interaction and make some employees feel more comfortable to ask questions. |
| Send a personal notice to each employee you want to attend via e-mail AND through the company mail, stressing the subject matter of the meeting and how important it is for employees to attend (i.e., mention the major benefits to the employee). |
| Schedule the meeting at a place and time convenient for the employees (for instance, if employees use car pools, don't schedule the meeting at the end of the day unless all carpooling employees are invited to the meeting). |
| Advertise the meeting on company billboards and elsewhere around the facility well in advance of the meeting. (Your 401k software includes material that can be used for such advertising.) |
| Collate all the meeting handouts into packages, and place them in colorful envelopes. Make sure to have more than enough for the number of employees invited to the meeting, and make sure each attending employee receives a package (perhaps by placing one on each chair). |
| Prepare an agenda (see Table 3-2) and stick to it. A copy of the agenda should be at the forefront of each handout package. |
| Include as part of the handout package a one-page summary of the 401k plan, its key provisions, features, and benefits. |
| If you're calling together a large group of employees, have a top-level officer of the company (preferably the CEO) introduce the meeting and give a pep talk — a good idea even for small meetings if the executive can attend multiple meetings. |
| Order enough investment prospectuses so that everyone can take a set home. |
| Table 3-2. Sample Enrollment Meeting Agenda |
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Agenda:
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| 1. Introduction by high-level management |
| 2. What a 401k plan is and why the company is offering one to the employees |
| 3. Employee benefits of participating in a pre-tax savings plan |
| 4. What's in your handout package, and why each document is included |
| 5. Summary of the company 401k plan |
| 6. Our 401k plan's investment options |
| 7. How to determine your personal investor profile and the type(s) of investments best suited to your needs — plus, the availability of personal investment and tax advice from qualified advisors. |
| 8. The importance of contacting the investment company(ies), asking for prospectuses on investments that interest you, and studying them carefully. |
| 9. Choosing the right 401k investments |
| 10. Calculating how much to contribute |
| 11. How to fill out the 401k Enrollment Form |
| 12. Where and when to return the 401k Enrollment Form |
| 13. Questions and answers |
Some companies opt for a relatively new procedure called automatic (or passive or negative) enrollment, in which every employee is automatically enrolled in the 401k plan as soon as he or she meets the plan's age and length of service participation requirements, whether or not he or she has made any active effort at joining the plan. Employees participate at whatever salary deduction rate and into whatever 401k investment(s) the company's published 401k automatic enrollment policy stipulates; a 3% of compensation deduction rate and a money market mutual fund are the most popular automatic enrollment policy coupling. Ample notification of the company's passive 401k enrollment policy and other restrictions and notification rules apply. For more on automatic enrollment, please visit the 401k Basics page of our website.
If your company has chosen automatic enrollment, you, the Plan Administrator should be aware of the following guidelines:
• All employees must be notified at least annually that the company 401k plan uses the automatic enrollment feature and how an employee can cease participation in the plan.
• Automatically enrolled participants must be immediately notified of their participation status.
• Any employer matching contributions being made to traditionally-enrolled participants’ accounts must also be made to automatically enrolled participants’ accounts.
• Automatically enrolled participants must have the opportunity to change their default investment selection and/or contribution rate.
• If an automatically enrolled employee soon after cancels his or her participation in the plan, any money put into the plan on the person's behalf must stay in the plan until the person's employment is terminated or the employee reaches age 65. At that point, the employee has the same withdrawal choices (IRA rollover, rollover into another employer's qualified retirement plan, or distribution) as any 401k participant of the same age and employment status.
TIP…The investment account company will mail prospectuses to you; order them at least 2 weeks before the meeting. Also, unless required, do not use the investment company's account application. Use your plan administration software's internally-created investment account application for all plan assets, attaching the two applications if necessary.
TIP…If employees have questions that you cannot answer, you should check our website's Frequently Asked Questions pages. If the question relates to how the plan administration software handles something, such as investments, you can call our technical support number: (818)501-4020.
Issue |
Current Law |
EGTRA |
|
Tax
Credits for New Small Employer Plans |
An
employer's costs related to the establishment and maintenance
of a retirement plan generally are deductible as business
expenses. However, there is no tax credit for such expenses.
|
Beginning
in 2002, small businesses with 100 employees or less will be
eligible for an annual tax credit of 50 percent on up to $1000
of administrative costs for the first three years of a new
plan. The credit is available only if at least one non-highly
compensated employee is participating.. |
|
Participant
Loans for Small Business Owners |
Generally,
plans may make loans to participants. But, prohibited
transaction rules prevent sole proprietors, partners, and
Subchapter S corporation shareholders from taking participant
loans. |
The
prohibited transaction rules are modified to allow for
participant loans to sole proprietors, partners, and
Subchapter S corporation shareholders. The provision also
applies prospectively to pre-existing loans. |
|
Repeal
of the Multiple Use Test |
In
addition to two nondiscrimination tests (the ADP and ACP
tests), some 401(k) plans must also satisfy the complicated
multiple use test. |
The
multiple test is repealed. |
|
Tax
Credits for Lower Income Savers |
Currently
there is no tax credit for low and moderate income savers.
|
Eligible persons will receive a non-refundable tax credit of up to 50 percent on up to $2000 in contributions to an IRA, 401(k), 403(b), SIMPLE, SEP or 457 plan. This credit is in addition to the tax deduction already associated with these contributions. In the case of joint filers, individuals whose adjustable gross income is less than $30,000 are eligible for a 50 percent credit. Joint filers with adjusted gross income between $30,000 and 32,500 are eligible for a 20 percent credit. Joint filers with income between $32,500 and $50,000 are eligible for a 10 percent credit. The income threshold for single filers is one-half the threshold for joint filers.
|
|
Catch-up
contributions for Older Workers |
The
Code limits the amount that can be contributed to a defined
contribution plan on behalf of an employee for any year. In
the case of elective deferrals, the limit is $10,500 per year.
There are no separate limits for older workers. |
Beginning in 2002, individuals who are age 50 or older will be allowed to make an additional contribution to a 401(k), 403(b), 457 plan equal to $1,000 in 2002, then increased by $1,000 each year until $5,000 in 2006, and then indexed in $500 increments. The catch-up amount for SIMPLE plans will be one-half of these amounts. The amount of the catch-up contribution will not be subject to nondiscrimination testing, provided all participating employees over age 50 are eligible to make a catch-up contribution. Also the catch-up contribution will not count against the employers deduction limit under section 404, or against the individual's overall 415(c) dollar limit. |
|
Modifications
of Top Heavy Rules |
A plan is generally considered "top heavy" if more than 60 percent of plan assets are held on behalf of "key employees." Due to the design of this test, top heavy rules essentially affect only small business. Key employees generally include officers earning over half the Section 415 defined benefit plan dollar limit ($70,000 in 2001), 5 percent owners, 1 percent owners earning over $150,000, and the 10 employees with the larges ownership interest in the business (as long as they earn more than $30,000). Further, family members of 5 percent owners are deemed to be key employees under family attribution rules. Top heavy plans must meet a special vesting schedule and make minimum contributions to all non-key employees to the extent contributions are made on behalf of key employees. |
A number of changes have been made here: · The definition of "key employee" is modified to delete the "top 10 owner" rule, provided that an employee will not be treated as a key employee based on his/her officer status unless the employee earns more that $130,000, and to eliminate the 4-year look-back rule for identifying "key employees." · Matching contributions will now count toward satisfying the top heavy minimums. · The matching contributions 401(k) plan safe harbor will be deemed to satisfy the top heavy rules. This does not mean that an accompanying profit sharing contribution automatically satisfies the top heavy rules, although the matching contributions will count toward otherwise satisfying the minimum. · The 5-year look-back rule applicable to distributions will be shortened to one year. However, the 5-year look-back rule will continue to apply to in-service distributions. · A frozen top heavy defined benefit plan will no longer be required to make minimum accruals on behalf of non-key employees.
|
|
Modification
of |
401(k)
plans generally must restrict distributions of amounts
attributable to elective contributions. An exception to this
restriction applies in the case of certain hardship
distributions. Treasury regulations provide a safe harbor for
determining whether a distribution qualifies as a hardship
distribution. To qualify for this safe harbor, a participant
receiving a hardship distribution must be prohibited from
making elective contributions to the plan for the 12 months
following the date of distribution. |
Treasury
is directed to revise its safe harbor hardship distribution
rules to reduce to 6 months the period of time participants
must be prohibited from making additional elective
contributions. Also, hardship withdrawals under the terms of
the pan will not be treated as eligible rollover
distributions. |
|
Modifications
to Limits on Retirement Plan Contributions and Benefits
|
Current law limits: · 401(a)(17): annual compensation taken into account limited to $170,000. · 402(g): elective deferrals limited to $10,500 per year. · 415(b): maximum annual benefits are the lesser of 100 percent of three-year high salary or $140,000 (or less for pre-65 retirees). · 415(c): maximum defined contribution plan contribution is the lesser of $35,000 or 25 percent of compensation. · 457(b): contribution limit is generally $8,500 per year. · SIMPLE: maximum elective deferral is $6,500 per year. |
Beginning in 2002, the Act raises all of the significant dollar limits as follows: · 401(a)(17) compensation limit to $200,000; and then indexed in $5,000 increments. · 402(g) elective deferral limit to $11,000 in 2002; then increased $1,000 each year until $15,000 in 2006; and then indexed in $500 increments. ·
415(b) annual
benefit limit to $160,000; and then indexed in $5,000
increments. Note that this provision applies to years ending
after ·
415(b) annual
benefit limit will no longer have to be reduced for
retirements ages 62 through 65. Note that this provision
applies to years ending after · 415(c) contribution limit to $40,000, and then indexed in $1,000 increments. · 457 elective deferral limit to $11,000 in 2000, then increased $1,000 each year until $15,000 in 2006; and then indexed in $500 increments. · SIMPLE elective deferral limit to $7,000 in 2002, then increased $1,000 each year until $10,000 in 2005; and then indexed in $500 increments. |
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Deduction
Limits |
A
sponsor of a profit sharing plan cannot deduct contributions
to the plan in excess of 15 percent of aggregate employees'
compensation. In the case of a stand-alone money purchase
plan, the deduction limit is the minimum funding requirement
for the plan. |
The
deduction limit for profit sharing plans is increased to 25
percent of aggregate employees' compensation. Money purchase
plans will be treated as profit sharing plans for purpose of
the 404 deduction limit and thus will be subject to the 25
percent limit. |
|
Increase
in 25 Percent of Compensation Limitation |
Under
Section 415(c), total annual contributions to a defined
contribution plan may not exceed the lesser of 25 percent of
compensation or $35,000. |
The
25 percent of compensation limitation has been increased to
100 percent of compensation. The dollar limitation will still
apply. The provision also repeals the maximum exclusion
allowance applicable to 403(b) plans. |
|
Repeal
of "Same Desk Rule" |
Under
the "same desk rule," a distribution to a terminated
employee is not allowed if the employee continues performing
the same functions for a successor employer. The same desk
rule applies to 401(k), 403(b) or 457 plans. |
The
same desk rule is eliminated by replacing "separation
from service" under Section 401(k)(2)(B) with
"severance from employment." Conforming changes are
also made for 403(b) and 457 plans. The provision applies to
distributions are after |
|
Employers
May Disregard Rollovers for purposes of Cash-Out Amounts
|
Terminated
participants' benefits may be cashed out if the
non-forfeitable present value of such benefits does not exceed
$5,000. |
A
plan is permitted to ignore amounts attributable to rollover
contributions when determining the cash-out amount. |
Do all states maintain 401(k) and other pension regulations and laws in synch with federal pension laws?
A: No, not necessarily. See the following important notice:
IMPORTANT TAX NOTICE
Some states maintain 401(k) and other
pension regulations and laws that are not in synch with federal
pension laws. As a result, residents of these states face the
possibility of over-contributing to their 401(k) plans or making
pre-tax distributions that may conform to federal law, but run afoul
of state law.
Additional non-profit websites that include relevant unbiased information about 401k plans include: www.pension-trade-association.org and www.401kadministrator.com.
As of January, 2002 residents of the following
states should check with their tax advisors concerning their state's treatment
401(k) contributions, IRA rollovers, pre-tax distributions, and the like. This
listing is provided for informational purposes only and is subject to change
without notice; It is important for all 401(k) participants to be aware of their
state's conformity with federal 401(k) regulations:RRP
Arizona
Arkansas
California
Georgia
Hawaii
Idaho
Indiana
Iowa
Kentucky
Maine
New Jersey
North Carolina
Pennsylvania
South Carolina
West Virginia
Wisconsin
 |
For more information: comments@401k-program.com |
