When hiring summer help or other part-time employees, it is important to understand your 401(k) plan’s eligibility requirements. Even though these employees are temporary, they may meet the plan’s eligibility requirements and must be offered the right to defer into your 401(k) plan.
If an eligible employee is not given the opportunity to defer into the plan, the employer may be on the hook to make up the missed deferrals or a percentage of the missed deferrals. There are many rules associated with making up the missed deferral amounts depending on how long the employee was left out of the plan and what features the plan offers.
As noted in the IRS’ 401(k) Plan Fix-It Guide:
“If the period of failure is less than three months, no corrective QNEC for the missed deferral opportunity is required. The excluded employee must begin to participate and if the plan provided for auto-enrollment, the commencement of deferrals occurs within the three-month period beginning from the start of the failure and the issuance of the special notice occurs within the 45-day timeframe.”
For additional information regarding eligibility and the errors an IRS agent may look for in a plan audit, read our blog Eligibility – Know Your Retirement Plan’s Provisions and Apply Correctly.
It is also very important to maintain census information on summer help or part-time employees in case they are ever rehired. As a general rule, if an employee satisfied the plan’s eligibility requirements during his/her initial period of employment, the employee would enter the plan on the date of rehire, unless the break-in-service rules came into play. Accordingly, the plan may not treat the rehired employee as a new employee that must re-satisfy the plan’s eligibility requirements.
Please contact your Watkins Ross Retirement Plan Administrator if you have specific questions regarding your plan’s eligibility requirements or if you discover missed deferrals for a new participant.