Connections for Success



Failing to Enroll Eligible Employees in Your Plan
James Pellino

Given the significant amount of administrative responsibilities of a plan sponsor, administrative glitches are inevitable when operating a retirement plan. One of the common errors we see when auditing plans is failing to add an eligible employee to your roster of 401(k) plan participants. The most common mistakes we see are either the employer omitting part-time employees who are covered under their plan document or considering employee’s ineligible because they chose not to make elective deferrals. This mistake likely will not create any significant issues to your plan’s qualified status, but it is important to identify the error sooner rather than later and take prompt remedial action. It is also imperative to read your plan document and understand what types of employees are eligible under your plan.

The IRS has set forth recommendations that can help mitigate any enrollment errors. These recommendations include:

  • Check how your plan document defines “employee” and plan participation eligibility requirements;
  • Train (or retrain) any employees who determine eligibility to participate in your plan;
  • Review payroll records for the total number of employees, birth dates, hire dates, hours worked and other pertinent information; and
  • Check W-2 forms and state unemployment tax returns and compare the employee data they contain with your payroll records for any discrepancies.

Notifying parties of the fix

The IRS considers inadvertently neglecting to enroll an employee in your plan when the eligibility period has begun an “operational error.” That means you must remedy it using the IRS’s “Self-Correction Program” without notifying the agency itself. If the operational error is “significant” (based on subjective criteria defined by the IRS), you may need to file with the IRS under its Voluntary Correction Program. In any event, you need to notify the affected employee/participant of what has happened. The required contents of the notice can be found in Rev. Proc. 2016-51.

Then, you must actually make the fix by the end of the second plan year after the year in which the error occurred—or have it “substantially corrected within a reasonable period of time.”  There is no specific deadline to fix “insignificant” operational errors.

ERISA standards

Although the Employee Retirement Income Security Act (ERISA) sets minimum standards for defining eligibility, sponsors are free to be more generous. Under ERISA, an employee is eligible if the employee has attained age 21 and has completed a year of service (defined as a consecutive 12-month period) in which the employee has logged at least 1,000 hours of work. This is referred to as the maximum statutory requirement for eligibility. When using these requirements, a plan must allow the employee to enter the plan no later than six months after meeting the requirements.

ERISA regulations elaborate on these minimum requirements. For example, they define the starting point for calculating service time, among other issues. Check with your benefits specialist or third-party administrator (TPA) to review the details.

So, what do you need to do if you have failed to timely enroll a participant? If you fix the error in less than three months after the employee should have been added to the plan, then you are off the hook. If not, the regulations require you to make a corrective qualified non-elective contribution (QNEC) to that participant’s account.

Calculating a QNEC

The regulations create a basic two-step formula for determining the amount of the QNEC. First, take the actual deferral percentage (ADP) for the employee’s category—such as non-highly compensated employee (NHCE) or highly-compensated—and multiply it by the employee’s compensation during the period that he or she was eligible to participate, but was mistakenly deemed ineligible. Second, multiply that number by 50%. The regulations reduce the 50% multiplier to 25% if you meet specific requirements and provide the affected employee with a notice within 45 days of being given the opportunity to make deferrals describing the failure and the correction being taken.

For example, suppose employee Mark was in the NHCE group and that group’s ADP was 8%. Mark’s annual compensation was $60,000, and he was wrongly excluded from participation for nine months. The math would be—$45,000 (earnings during that nine-month period) × 8% × 50% = $1,800.

QNEC contributions are automatically fully vested in the employee’s 401(k) account. Different deadlines apply to errors made in plans that use auto-enrollment and some “safe harbor” remediation alternatives are available. Again, check with your benefits specialist or TPA for the details. Do not forget that any missed employer contributions, such as matching or profit sharing contributions, must be made to the accounts of affected participants.

For more information, contact Jim Pellino at [email protected] or 312.670.7444. Visit to learn more about our Employee Benefit Plans Services.

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